Tesco Profitability Improves As Inflation Cools

No change to fair value estimate but Tesco remains one of the best-positioned grocers in our European coverage

Verushka Shetty 3 October, 2024 | 2:30PM
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Tesco

No-moat Tesco reported interim 2024/2025 results with top-line profits driven by volume growth as the inflationary environment normalized.

Retail like-for-like sales were up 2.9%, with UK sales up 4.0%, and Ireland sales up 4.7%.

Booker sales were down 1.9%, with the decline in tobacco and Best Food Logistics volumes offsetting strength in catering.

From a channel perspective, all formats were up, led by digital growth of 9.3%.

Key Morningstar Metrics for Tesco

• Economic Moat: None
• Fair Value Estimate: GBX 316.00
• Forward Dividend Yield: 3.41%
• Morningstar Rating: 2 stars
• Sector: Consumer Defensive
• Morningstar Uncertainty Rating: Medium

Within the UK, market share rose 62 basis points year over year to 27.8% with strong performance particularly from large stores.

Ireland saw market share gains as well, increasing 88 basis points year over year to 25.3%.

We were also pleased to see Central Europe sales up 0.6%, signaling a gradual improvement in consumer sentiment.

Operating profit was up 15.6% from the prior-year period, implying a margin of 4.7%, primarily driven by retail operations.

The combined UK and Ireland operating profit was up 9.8% and Central Europe operating profit was up 6.5%.

Due to stronger-than-expected performance in the first half, management raised its fiscal 2025 outlook for retail adjusted operating profit to £2.9 billion, up from £2.8 billion.

The firm continues to expect to generate retail cash flow of £1.4 billion to £1.8 billion, in line with medium-term guidance.

Given that we were previously ahead of operating profit guidance, we maintain our 316p fair value estimate.

We reiterate that Tesco is one of the best-positioned grocers in our European coverage. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Tesco PLC341.90 GBX0.50Rating

About Author

Verushka Shetty  is an associate equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc

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