- Firm enjoyed strong volume growth
- Investing in price for long term
- No upgrade to current-year earnings
The UK’s biggest supermarket chain Tesco (TSCO) reported strong trading and its highest market share since 2016 over the third quarter, including Christmas, as hinted at by the Kantar grocery sales data released a few days ago.
However, the shares slumped in morning trade, at one point losing 15p or 4% to 355p, on disappointment at the lack of a profit upgrade and widespread investor selling of UK stocks on the back of rising gilt yields.
PRIORITISING VOLUME GAINS
Over the 13 weeks to 23 November, UK like-for-like sales were up 3.8%, rising to 4.1% for the six-week Christmas period to 4 January, as the firm took market share and enjoyed switching gains ‘from all corners of the market’ to quote chief executive Ken Murphy.
Most of the advance was on the back of volume growth as the firm took the opportunity to ‘lean into’ pricing during the quarter to attract more shoppers and increase its value market share to 28.5%, the highest in eight years.
Finest sales rose over 15%, and the company sold more than 1.4 million bottles of prosecco, with the week leading up to Christmas the busiest in its history in terms of overall sales.
While this investment in pricing sets the company up well for long-term growth, it means there is no increase in the full-year outlook, to the disappointment of analysts, who had penciled in adjusted operating profit of £3.06 billion for the year to March 2025 against the company’s unchanged forecast of £2.9 billion.
EXPERT VIEW
While noting the lack of change to guidance, Shore Capital's head of research Clive Black said Tesco was ‘well set to face into the challenging UK consumer economy where sentiment is rather weak and forthcoming cost pressures evident’.
He added: ‘We like the ongoing investment thesis of a cash compounder, albeit sentiment and momentum are a little sideways today, but the stock could be a notable relative winner as matters unfold’.
Black’s comments seemed to catch the mood as the shares recovered to 364p for a loss of just 6p or 1.7% by mid-morning.
