...but don’t go shopping for quick profit in Tesco shares
AS Tesco so famously tells us, Every Little Helps, and the store’s beleaguered shareholders were hoping for at least a crumb of comfort from yesterday’s halfyear results.
The grocer tried to look on the bright side, with strong like-forlike sales and mostly maintained profits guidance for the full-year. However, the top end of this guidance – which gives analysts an idea of what to expect when it next reports – was trimmed modestly, sending shares spiralling to sixyear lows.
Like other retailers, Tesco is dealing with a long shopping list of problems, most of which are not of its own making. The cost of food is rising, and chief executive Ken Murphy says Tesco customers are ‘watching every penny’ to make ends meet.
That means changing customer behaviour such as smaller basket sizes, more own-brand shopping and a Christmas more like Bob Cratchit’s than the traditional Bacchanalian feast.
Tesco must adapt to this without losing share to discounters such as Aldi and Lidl, and this may mean tighter margins and lower profits. For example, it costs almost as much to deliver two smaller shops as one larger one, so while customers are cautious, Tesco’s costs rise.
There is plenty of uncertainty on the horizon, too, something that the stock market absolutely hates. Murphy acknowledged that it is ‘too early to predict how customers will adapt’ to continuing price inflation. ‘Significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve,’ he warned.
But while Tesco shares are in the bargain bin, there are still reasons to be cheerful, including a 20 per cent increase in the interim dividend. Analysts at Goldman Sachs described performance as ‘mixed’, with like-for-like sales ahead of expectations though profit margin was below expectations. William Woods, at Bernstein, likes the company’s new strategic framework focused on Value, Clubcard, Convenience and finding £1billion of cost savings over three years. The company is also returning cash to shareholders through a buyback.
Woods described the plan as ‘a considered but potentially cautious framework, which we think is right given the challenges to the sector’.
Clive Black, at Shore Capital, has a Hold rating on the stock, despite acknowledging a good first-half performance and the company’s high level of free cash flow and assets.
He says he’s nervous due to inflation, as well as what he calls the ‘totally inept and incompetent British Government’, which is pushing up borrowing costs.
‘Quite what the future holds for Tesco’s earnings remains to be seen, but uncertainty abounds,’ he warns.