5 October 2022
If you are covering Tesco’s interim results, please see the following comment from Chris Beckett, head of equity research at Quilter Cheviot:
“Tesco posted a mixed set of numbers in this morning’s interim results as the company positions itself for the worst of the cost-of-living squeeze.
“Sales have grown, but by less than the current rate of inflation as consumers trade down and Tesco has chosen to improve its competitiveness versus discounters such as Aldi and Lidl. Having said that, market share gains and the accelerating like for like sales growth in Q2 are encouraging.
“Booker (wholesale) is performing well as catering demand recovers post-pandemic, but online has declined for the same reason – though sales are still far higher than they were pre-pandemic.
“Tesco’s profit margin declined 80bps to 3.9%, but this remains far higher than its competitors. Food retails is a low margin business where scale matters to returns, and Tesco currently remains very advantaged. Cost inflation in terms of both wages and goods, as well as lower volumes and decisions to improve price competitiveness have all contributed to the lower profitability.
“Guidance for full year results have been narrowed to the lower part of the previous range, which is reasonable considering the worsening cost-of-living squeeze.
“Tesco stock is down 27% year to date so market deterioration is largely discounted, though its outperformance of competitors is well deserved. 10 times next year’s expected earnings is an attractive valuation.”
