Retail

Tesco First-Quarter Results – What The Analysts Said

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Tesco has reported a 2.0% increase in group sales on a like-for-like basis in the first quarter of its financial year, although sales in its core UK retail business were down 1.5% in the period.

"Although difficult to separate from the significant impact of lapping last year’s lockdowns, we are seeing some early indications of changing customer behaviour as a result of the inflationary environment," commented Tesco chief executive Ken Murphy. [Read more here]

Here's how leading industry analysts viewed its performance.

Clive Black, Shore Capital

"Tesco's Q1 FY23 trading statement takes on a little bit more meaning and profile for investors and the wider retail ecosystem as it emerges at a time when central banks are struggling to control inflation that they partly stoked, living standards in the Group's retail markets are under-pressure, and shoppers are necessarily cutting back, particularly through online purchases.

"Accordingly, price (inflation) is the key component of the Tesco top-line, offset by falling volumes with mix showing signs of evolution too, particularly around private label versus proprietary brand participation, as Aldi Price Match and Everyday Low Prices price product sales up c.19% year-on-year. That said, we do not believe there is a material lurch down in mix between higher and lower levels within categories. That said, Tesco's statement speaks to 'early indications of changing customer behaviour as a result of the inflationary environment'.

"With all these moving parts at an aggregate level Tesco guide to FY23 profit and cash expectations from its perspective remaining unchanged, which we welcome. So, with respect to the FY23 financial out-turn, we retain our present FY23 forecasts of £2.45 billion adjusted retail operating profit, CPTP of £1.98 billion and EPS of 20.6p."

Alex Smith, Third Bridge

“Tesco is attempting to be the last of the big UK supermarkets to pass on inflation costs to customers as it looks to gain market share and use its scale to manage costs. It is also expanding the number of lines in its successful Aldi price match campaign.

“Tesco’s market leadership gives it more bargaining power to negotiate down prices with suppliers. However, its relatively limited product range and fragile reputation means it can’t push negotiations too far.

“Tesco was a pandemic winner and our experts expect it will continue to grow market share over the next 12 months. Its Clubcard scheme remains a competitive advantage for the group.

"With the new display rule, supermarkets will give away premium promotional space to healthy food. However, with high inflation, our experts say that it is unlikely we’ll see a dramatic shift in carrier mix in the months ahead.”

Russ Mould, AJ Bell

“In relative terms, Tesco is in a decent place. The supermarket is the market leader and its scale enables it to drive a hard bargain with suppliers to help protect its margins against mounting inflation without putting up prices too much for shoppers.

“However, Tesco is far from immune to the challenges facing all consumer-facing businesses and that is evident in its latest update. Overall sales figures enjoyed a positive contribution from inflation, but volumes seem to be falling as habits start to shift in the face of challenged household budgets.

“To a large extent Tesco is not overly exposed to discretionary spend pressures, bar elements of its wholesaling Booker business and its clothing and general merchandise lines. People might try and economise on their grocery shop, but ultimately they will still need to buy food and toiletries.

“Tesco has been well-run since ‘Drastic’ Dave Lewis took over when the company was at a low ebb in 2014 and that appears to be continuing under his successor Ken Murphy. The business has been streamlined, issues like the pension scheme have been sorted out and its debt has been refinanced. This means a good portion of the cash the company generates can be handed back to shareholders through dividends and share buybacks."

William Woods, Bernstein

"Tesco's reported Q1 trading this morning with strong overall sales performance at +2% group LFL (+200bps beat) and UK & ROI +1.5% (+180bps beat). However, UK sales were -10bps weaker than expectations and commentary remains cautious, which may reflect poorly during the day.

"Within the UK & ROI, Booker was strong at +19.4% (vs. +9.6% expectations) with a strong recovery in catering (+57% with 13,000 net new customers). UK was weaker at -1.5% vs. company consensus of -1.4% but below our expectations. This negative LFL was expected given the reset in demand post-pandemic, which was offset by higher inflation."

© 2022 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.

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