- Year-end sales beat forecasts
- Group ‘in great shape’ for 2024
- Operating profit outlook raised
Supermarket group Tesco (TSCO) cemented itself as the UK’s number one grocer with record Christmas sales and pleased shareholders by raising its full-year earnings outlook, in contrast to second-placed Sainsbury’s (SBRY) which disappointed the market with its guidance yesterday.
Tesco shares climbed 0.8% to 299p, just shy of their recent 12-month highs, while Sainsbury shares slipped 0.5% to 285p, compounding yesterday’s 6.3% price decline.
SALES TOP FORECASTS
Like-for-like sales in the third quarter to 25 November were up 6.6% led by a 7.9% increase in the UK, ahead of market forecasts for a 7.5% rise.
For the six weeks to 6 January, sales were up 6% driven by a 6.8% increase in the UK with the group seeing its busiest ever day on 22 December and registering its highest ever Christmas Eve sales.
Continuous investment in pricing, with the sticker price of around 2,700 items reduced by an average of 10% over the 19 weeks to 6 January, meant the firm was the cheapest full-line grocer for over 14 months in a row.
Importantly, volume growth across the period was ‘consistent’, including sales of branded goods on deals, and the group continued to innovate with the introduction of over 550 new products.
A third of new products were Finest, Tesco’s premier own-brand range, which experienced record sales over the Christmas week as customers switched from premium retailers.
Total Finest sales for the period were up 16.7%, with around 18 million shoppers adding one or more items to their basket.
Chief executive Ken Murphy was far from complacent on the analysts’ call, however, referring to a ‘relentless focus on value’ and a ‘battle for every basket’, but he said the group had great momentum off the back of the Christmas period and was starting the New Year ‘in great shape’.
Reflecting that confidence, the firm raised its guidance for full-year retail operating profit to £2.75 billion from a range of £2.6 billion to £2.7 billion previously, while full-year free cash flow is seen in the region of £2 billion.
EXPERT VIEWS
‘Tesco’s latest update was always going to be compared with that of Sainsbury’s and on this basis it scores well as, unlike its rival, it has delivered a profit upgrade after a record Christmas’, commented AJ Bell investment director Russ Mould.
Clive Black, head of consumer research at Shore Capital and a noted retail-watcher, said Tesco had ‘joined the winners in the British grocery scene’ alongside Aldi and Lidl.
‘We like the cash-compounding nature of the Tesco investment thesis, noting that the firm is expediting a strategy where controlled growth is part of the plan. Hence, the visibility around future earnings and cash flow generation strengthens and so do ongoing dividends, buybacks and self-funded organic progress’, added Black.
Echoing these positive comments, Killik & Co senior equity analyst Martin Maloney said Tesco shares were ‘undervalued given the improvement in the underlying fundamentals of the business, the strong competitive positioning in online and convenience and Booker’s future growth prospects’.
Consensus forecasts for earnings growth together with an increasing dividend and share buybacks ‘imply a potential shareholder return in the low- to mid-teens annually over the medium term’, he added.
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Martin Gamble) own shares in AJ Bell.
