9 January 2025
If you are covering Tesco’s latest results, please see the following comment from Lucy Rumbold, equity research analyst at Quilter Cheviot:
"Tesco released its Q3 and Christmas trading update this morning, delivering a strong set of results that came in slightly ahead of consensus expectations. Group sales increased by 2.8% in Q3 and 3.7% during the Christmas trading period. The UK was a key driver of performance, with Q3 sales rising by 3.8%, while Ireland also delivered solid growth, with Q3 sales up 4.4%.
"Booker faced challenges over the quarter, reflecting ongoing declines in the tobacco market and weaknesses in its best food logistics division. However, Booker managed a positive turnaround over Christmas, driven by volume growth in its core catering service. Meanwhile, Tesco’s Central Europe operations performed well, achieving 3.5% Q3 sales growth, attributed to improvements in customer satisfaction.
"Tesco continues to gain market share, with an 80 basis points year-on-year increase, now standing at 28.5%. This growth has been driven by higher customer satisfaction and increased volumes. Trends throughout the period highlighted that consumers are willing to trade upwards, as evidenced by the 15.5% growth in Tesco’s Finest range. Similarly, the premium trend was echoed in M&S’s Q3 sales, which rose by 9%.
"Inflation over the four-week period leading up to Christmas jumped to 3.7%, signalling the industry’s adaptation to the cost implications of rising budgets. Tesco anticipates an additional £200m impact from National Insurance contributions and another £200m for wages, but its ongoing cost-saving programme, which is estimated to deliver £500m in savings this year, puts the company in a strong position to absorb these pressures and minimise the extent of cost pass-through to consumers.
"Retail media also represents a compelling growth avenue for Tesco. By leveraging its Clubcard data and advertising capabilities, the company is able to generate additional revenue, deliver personalised campaigns, and improve efficiency, offsetting some operational costs in the process.
"The company has reiterated its full-year guidance, forecasting operating profit of £2.9bn.
"Overall, Tesco enjoyed a strong Christmas trading period. While the stock currently trades at 13.7x earnings—a premium compared to competitors—this valuation appears justified given its robust performance."
