SHORE CAPITAL - Initial Trading Comments - 13 March 2023

Strong Christmas underpins Q3 performance; testing times ahead!

Tesco’s trading performance for the Q3 plus Christmas (19 weeks ended 7 January 2023) was broadly in line with our expectations. The Group’s lfl sales grew 6.4% during the period, with all retail segments clocking robust momentum. The management has confirmed the annual profit target: operating profit for the retail business at £2.4-2.5bn, £120-160m for the banking operations and group FCF of at least £1.8bn. Despite announcing a good start to 2023, Tesco’s FY23/24 earnings are likely to remain

Better placed to tackle the ‘Discounter Juggernaut’

Tesco’s share price is down >25% YTD, plagued by weakening consumer sentiment and increased earnings pressure in the UK. Even the strong half-yearly performance could not lift investor sentiment. We expect consumers to incline more towards the German discounters in the near-term, looking to cut corners wherever possible. The recent rebound at close competitor Asda (lesser market share erosion) complicates the matter further. While Tesco’s mid/long-term fundamentals and valuation remains attracti

Better placed to tackle the forthcoming headwinds

Tesco’s Q1 trading performance was a mixed bag. The UK and ROI retail business was softer than expected but overall sales were stronger than our estimates. Wholesale business Booker and Central Europe led the pack. The company witnessed market share gains in almost all geographies. However, management has accepted that cost pressure is posing a challenge. The annual profit outlook has been maintained. We will trim the financial estimates slightly.

SHORE CAPITAL - INITIAL MORNING TRADING COMMENTS

Cementing the footprint despite turbulent times!

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

Decent start of the year

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.

A softer closure to the year

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.

Q3 trading update: staying ahead of the curve

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.