Expect solid Xmas trading with a tweak up for FY profit/cashflow guidance Ahead of Tesco''s 3Q25 and Xmas trading update on the 9th of January 2025 (Kantar data out on 7th Jan), we update our forecasts to reflect Kantar and ONS data. For 3Q25 we forecast UK LFL of +3.5%, +3.0% over Xmas. We expect ROI to be strong at +5% for both periods, with Booker weaker at -1.9% for both periods. While industry concerns on the impact of National Insurance (NICs) increases will add an element of caution, we still see Tesco increasing FY25e Retail Profit guidance to ''around GBP2.95bn'' (from around GBP2.9bn, BNPPe GBP2.98bn, VA cons GBP2.96bn), with Retail FCF towards the upper end of the GBP1.4-1.8bn guided range (BNPPe GBP1.8bn). Cost pass through pivotal to industry outcome for FY26e Though Tesco will try to hold costs back from the consumer, at an industry level we believe higher operating costs resulting from increased NICs (effective 1st April 2025) will lead to higher UK food inflation in Tesco''s FY26e. With this note we take our food inflation forecast up to 3% for 2025, tweaking down our volume assumption to get market growth of +3.5%. We forecast Tesco UK LFL in FY26e of +3.0% (vs +3.6% in FY25e), with overall growth of +3.5%. Continue to view Tesco as the best positioned grocer in our coverage As we wrote in TESCO: More than a little that helps, we see Tesco''s price positioning vs the discounters, balance sheet and market share momentum as the strongest in our 15 years following the stock; while its peers have never been so capital constrained and the regulator less critical. While NICs adds an element of uncertainty, we believe the above setup, tailwind from retail media and ongoing capital returns (b/back 3%, divi 3.7% of market cap) mean Tesco has now made the transition to becoming a consistent double digit TSR stock. We sit 2/5% above FY26/27e EPS consensus. Our estimates are broadly unchanged, our TP falls to 425p (from 445p) on higher UK risk free rate. At...