- Sales improve but at the expense of earnings
- ‘Tangible evidence’ of changes in consumer spending
- Further investment in prices leads to a cut in outlook
Having initially rallied 1%, shares in the UK’s largest supermarket chain Tesco (TSCO) traded 2.5% lower at 205p by mid-morning as investors digested the company’s lowered full year pre-tax profit outlook.
Despite the firm maintaining its position in an extremely challenging market and increasing its free cash flow guidance and interim dividend, fears over a continuing squeeze on margins appeared to hold sway.
FOCUS ON VALUE
Group sales for the six months to August rose 3.5% on a reported basis and 3.2% on a like-for-like basis to £28.18 million, with UK and Ireland like-for-like growth slightly slower at 2.7% while sales in Central Europe jumped 10.4% on an organic basis.
In the UK, large-store sales rose by 1.4% while online sales dropped by 11.3% as growth ‘normalised’ and more customers reverted to in-store shopping.
Food sales were up 1.6%, but there was a marked increase from the first quarter - which a year ago saw everyone cooking at home and therefore spending more on groceries - to the second quarter.
Non-food sales - which only make up around 8% of the group total - fell by 6% during the half but again there was a big improvement in the second quarter with both home and clothing sales almost flat on last year.
Overall, chief executive Ken Murphy described the results as ‘a solid performance in what is undoubtedly a challenging environment’, noting the firm had maintained its strong position in all its markets thanks to what he called its ‘laser focus’ on customer value.
LOWERED GUIDANCE
Whereas in June, Murphy said the group had started to see ‘early signs’ of a change in customer behaviour, in today’s update he said there was ‘tangible evidence’ of that change with customers prioritizing value by buying more own-label products and switching from fresh to frozen to avoid waste.
On top of its ‘relentless’ drive to keep prices down through its Aldi price match and Clubcard offers, which are bringing more customers through the door, Murphy said Tesco would freeze the price of over 1,000 products until 2023.
However, the net result of investing heavily in prices is that pre-tax profits for the year to next February are likely to be at the low end of the firm’s revised forecast range of £2.4 billion to £2.5 billion.
On a positive note, the firm’s ‘Save to invest’ cost-reduction plan is expected to register around £500 million of savings this year and is on track to deliver the full £1 billion of savings by February 2024, a year ahead of schedule.
Commenting on the results, Shore Capital head of research Clive Black said that with grocery inflation persistently high and rising interest rates pressuring consumers even further, ‘pressure on earnings is downward rather than upward at Tesco and many other consumer stocks’, leading him to cut his outlook for February 2024 earnings as well as this year.
