The UK’s largest supermarket Tesco (TSCO) raised full year earnings guidance after stronger than expected third quarter trading.
Like rival Sainsbury’s (SBRY), the firm posted a jump in sales over the Christmas period with like-for-like revenues in the UK and Ireland, excluding VAT and fuel, up 2.7% on the previous year, which itself was exceptionally strong, showing 9.2% growth over 2019.
Yet Tesco stock fell 2% to 287p, presumably because its robust quarterly performance was anticipated by the market. The share price has rallied 16% since the start of October 2021.
BROAD-BASED GAINS
According to figures from consultancy Kantar, Tesco enjoyed its largest market share for four years in the 12 weeks to Boxing Day. Tesco, which accounts for more than a quarter of the nation’s grocery sales, saw improved in-store and online sales and racked up its 22nd consecutive period of switching gains, where it wins customers from rivals.
Large store sales were up 1.9% on last Christmas on a like for like basis and 2.4% higher over the full 19 weeks to 8 January, while growth at convenience stores was marginally higher at 2.6% over Christmas and 2.7% to early January.
The shift to ordering online looks to be permanent with the firm posting like for like sales up almost 60% on the same quarter of 2019 as it racked up around 1.2 million orders a week, giving it its highest share of online shopping since the pandemic began.
The Booker wholesale business saw a strong rebound in sales as its retail and catering customers were allowed to keep trading over the quarter. Londis, Budgens and Premier all traded particularly well over the Christmas period as customers made last-minute purchases.
INCREASED GUIDANCE
Thanks to the better than expected results, the firm nudged up its outlook for retail operating profits for the year to March to slightly above the top end of its existing guidance of between £2.5 billion and £2.6 billion.
As with Sainsbury’s, the bulk of the upgrade is down to retail volume and revenue growth but there is also a small contribution from Tesco Bank which is reducing its provisions for bad debts due to more favourable economic forecasts.
Chief executive Ken Murphy flagged the importance of the firm’s investment in prices and product availability which ‘put us in a strong position to meet customers' needs as, once again, COVID-19 led to a greater focus on celebrating at home. As a result, we outperformed the market, growing market share and strengthening our value position.’
EXPERT VIEW
Clive Black, head of research at Shore Capital, believes the investment thesis ‘has evolved nicely’ since Murphy took over during the second lockdown in October 2020.
‘Tesco’s operating strategy is proving to be very effective, set around consistently high basic store standards and an evolving value proposition’, says Black, adding that in an environment of rising interest rates ‘asset backed, cash generative, liquid and defensive stocks like Tesco may just be a good place to have a presence’.
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