Tesco’s H1 performance was stronger than our and the street’s expectations. The key takeaways were positive lfl in Q2, a gain in market share, step rise in operating profit and a credible plan to generate future growth. Moreover, the success in clocking price deflation (despite external headwinds) and adept supply chain management were also some noticeable developments. We remain positive on the company’s management and the stock’s prospective performance. We will improve our financial estimates
Companies: Tesco PLC
There were no major surprises in Tesco’s Q1 trading update. The group’s lfl growth of 1.0% was led by a revival in the catering business (+68.1% yoy). Online growth also remained robust at +22.0%. Management has confirmed the annual guidance. We continue to see Tesco as the healthiest amongst the UK’s ‘Big Four’ players and maintain the positive stance on the stock’s valuation.
Tesco’s preliminary results for FY20/21 were ahead of consensus but below our estimates. The strength in the UK & ROI was offset by a weak show in Central Europe and Tesco Bank. Going forward, we expect some moderation in sales but the operating profit is estimated to improve. Online is also likely to remain a key growth engine. We will be trimming the financial estimates but maintain the positive stock recommendation.
Looking Ahead At The Next Week
Tesco has reported a strong trading performance, largely driven by the UK and ROI. Once again, online was a key growth engine with c.80% sales growth. Despite an increase in the COVID-19-related costs (+£85m to £810m for FY20/21), the company has maintained annual retail operating profit (excluding the business rate payment) to be at least equal to the previous year. We maintain a positive outlook for the stock’s valuation.
Tesco’s share price has declined over the past few weeks, and this is despite announcing strong Q1 results. While FY20/21 is likely to be a tough year (benefits of high sales volume and business rate relief offset by the spike in pandemic related expenses), we reiterate our faith in the business strength of the retailer.
Tesco has announced the disposal of its Asian business to CP Group, the largest conglomerate in Thailand. The $10.6bn cash deal (equivalent to £8.2bn) tops the market’s expectations and a healthier balance sheet should help Tesco to tackle better the increasing competition on its domestic turf. We remain positive on the stock.
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