Tesco Turnaround Continues with ‘Stellar’ Sales Growth

Inital share rally after the supermarket giant posts better than expected quarterly results

Emma Simon 16 June, 2017 | 11:32AM
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Tesco (TSCO) shares rose strongly in early trading on Friday, after the supermarket group announced that sales continued to grow ahead of expectations.

In the first three months of this year like-for-like sales rose by 2.3% - ahead of analysts’ prediction of 2.2%. Sales of fresh food helped drive this business growth, with like-for-like sales rising by an impressive 2.7%.

This is now the sixth consecutive quarter that Tesco has reported positive growth figures, raising investors’ and analysts’ hopes of a more sustained recovery for the beleaguered supermarket group – despite difficult trading conditions.

Commenting on these first quarter results, chief executive Dave Lewis said: “This is a good start to the year. In tough market conditions we have stayed true to our commitment to helping customers – working closely with our supplier partners to keep prices low.”

But while analysts welcomed this sales growth, they pointed out that the supermarket faced a number of headwinds.

Weaker Sterling could Threaten Margins

Laith Khalaf, senior analyst at Hargreaves Lansdown said: “Recovery is continuing at Tesco, despite the squeeze on consumer incomes from weak wage growth and rising inflation. The going is still tough though, as the sector is highly competitive and a falling pound will put pressure on supermarket margins.”

Vinay Sharma, senior trader at Ayondo Markets said the “stellar” quarterly growth figures were encouraging: “Even more encouraging was the fact that Tesco have resisted the urge to increase prices at the same rate as inflation, clearly helping to boost sales.”

Helal Miah, investment research analyst at The Share Centre added: “Momentum continues to gather pace at Tesco. The sales figures look good, and the market initially reacted positively with shares going up by more than 4% in early trading – before falling back again.

“What we are seeing is a business that is still in transition. Whilst we believe the worst may be behind for Tesco, the competition levels will continue to remain tough and margins therefore will not return to historic levels anytime soon.”

The Share Centre said they expected the dividend to be raised, but investors should appreciate that this too will take time to get back to historic norms.

Shares are still a long way from its peak, according to figures from Morningstar. In late 2007 shares were trading at 487p. In early trading this morning, after this initial rise there were worth 178.97p.

Over the past year, Tesco’s share price has risen by 19%. But this should be viewed against the 6.9% loss investors have suffered over the past three years. In comparison, the FTSE 100 has risen by more than 10% over this three year period.

Questions over Executive Pay

The supermarket also faces a number of other challenges: these include a pension scheme revaluation, which could see the deficit on its pension increase substantially.

It is also in the process of compensating shareholders for the 2014 accounting scandal. At its AGM – due to take place on Friday, after the quarterly results announcement – shareholders are expected to raise concerns about the chief executives renumeration, in particularly the £142,000 relocation package he was recently awarded despite being on a £4.1 million pay package. Questions may also be raised about its recent purchase of cash and carry company Booker, which was not mentioned in Friday’s quarterly results.

The supermarket giant has been involved in a widescale restructuring of its business, recently selling Dobbies garden centre, Harris & Hoole coffee shops and the chain of Giraffe restaurants.

Morningstar analysts give Tesco two stars: reflecting the fact that at its current share price it is ‘fair value’. However, it says the company does not have a ‘moat’ – meaning its business is vulnerable to competitors. In the highly competitive supermarket sector, companies like Tesco face pressure from both ‘discount’ stores, like Lidl and Aldi, as well as high-quality upmarket brands such as Waitrose and M&S Foods. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk