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Tesco^ (TSCO, Buy at 381p) - Surprise but sound senior management changes.
Tesco PLC
Tesco^ (TSCO, Buy at 370p) - Excellent execution, precautionary guidance
FY26 guidance looked good to us - clearly expectations weren''t as low as we thought Tesco''s FY25 results came with guidance for FY26 that implied EPS c.-6%/-11%/-15% below Bloomberg consensus at the top/middle/bottom of the range, with the midpoint of the EBIT range 9% below consensus and 9% below FY25 EBIT that came in ahead of expectations. While the guide was actually only 2% lower than the range we wrote about last week, with plenty of reference to firepower and flexibility, the stock was down c.6% on the day, underperforming the Stoxx 600 by 10% (though the performance gap is now back to where it was pre-Liberation Day). New guide embeds material price investment - Asda not the only concern Updating the detailed FY26 profit bridge we published last week, post-company conversations we believe the guide embeds more price investments than we initially thought. With total wages and other opex expenses less of a headwind than we had modelled, our new FY26 operating profit estimate of GBP2.9bn (down GBP100mn) now sees Tesco fully matching Asda''s expected price investments of c.GBP250mn on a proportional basis. However, for us, arguably the bigger threat to numbers from here is a cautious consumer trading down and/or moving back to discounters, helped by a (albeit modest) step up in space growth - as seen in the most recent Kantar print. Risk/reward now more skewed to the upside, re-iterate Outperform rating And so, while our initial assessment of Asda''s price cuts and Tesco''s response leads us to believe there is a very real possibility that we get to the end of the year with Tesco''s share position intact and profits at or above the top end of the range, with material cost pressures and discounter share ticking up on top of Asda''s moves, at this stage we cut our estimates to reflect a material investment. Our updated bear/base/bull scenario now shows outcomes -17%/+18%/+60%. With this compelling risk reward, we maintain our Outperform rating (new TP...
BNPP Exane View? If you had ''flexibility'', ''firepower'' and ''rational'' on your Tesco FY25 results call bingo card, then congratulations. Without giving away any competitive specifics or telling us what would get to the top or bottom end of their FY26 profit guidance range, Tesco did their best to simultaneously convey that they have the capacity and the intent to defend share, will be investing in price, but are and will act rationally in a rational market. As expected, they consistently referenced their strong momentum, driven by value credentials, and their intention to protect share longer term - which we believe is the right message. However, we do note a return to referencing strong comparables making share gains tricky on a short term basis. Alongside Ken''s comments on cost/price intensity potentially peaking in the summer and the market slowdown seen in the most recent external data, this will likely mean investors may not feel any urgency to jump in in the near term, especially if consensus settles above the midpoint of Tesco''s range. Overall, with the stock now -15% YTD vs SXXP -3% we''re back where we were pre Liberation Day, with the investment case the same for us. On a one year and beyond basis, we think Tesco is doing the right thing and will win, but in the shorter term the datapoints won''t all be positive. Other details: On the guidance: which implies Group FY26e EBIT down 9% YoY at the midpoint, underlying UK margins down c.50bps (-30/-70bps at the top/bottom of the range). Tesco was keen to emphasise that it gives them ''flexibility and firepower'', with a determination to maintain the winning value formula and market share they have worked so hard to achieve. CFO stated that depending on ''how things play out'' they could come out at either end of the range, but did note they Tesco will be rational and only invest where they have to - saying that they won''t invest if they don''t have to. On market share: Tesco took this one back to...
Tesco^ (TSCO, Buy at 322p) - Getting the knuckle-duster out - 6-9% implied FY26F EBIT downgrade
What happened? Tesco reported 4Q24/FY25 results. FY25 Sales +3% to GBP69.9bn (vs BBerg cons. GBP70.0bn, BNPPe GBP69.7bn). 4Q25 UK Grocery LFL of +4.3% was vs cons +4.2%. Retail EBIT was GBP2,973bn, 8% YoY (vs cons.GBP2.96bn, BNPP GBP2.93bn). Group EBIT +11% of GBP3.13bnm vs cons GBP3.07bn. Underlying EPS of 27.4p, was +17% and +3% above vs cons 26.6p/ Retail FCF (FY25) was GBP1.75bn (vs GBP2.1bn FY24; BNPPe GBP1.71bn). Below the line cash exceptionals were GBP55mn vs GBP98mn in FY24. Net debt was GBP9.5bn (from GBP9.7bn). FY25 dividend of 13.7p/share was +13% YoY. Guidance: Operating profit: Tesco guided to a group adjusted operating profit range (now inc. cGBP100mn from financial services) of GBP2.7bn to GBP3.0bn. At the midpoint, this is down -9% YoY and -9%/-5% below Bberg cons/BNPPe of (GBP3.14bn/GBP2.99bn) This very close to the guide we forecast in our note last week, which we believe is close to buyside expectations. Tesco state that the market has got more competitive and this guidance gives them the ''flexibility and firepower to be able to respond to current market conditions''. Retail FCF: Tesco have re-affirmed their medium term range of GBP1.4 to GBP1.8bn (BNPPe GBP1.6bn ex financial services). Buybacks: in line with market/our expectations Tesco will buyback GBP750mn stock as part of their ongoing capital returns programme, with a further GBP700mn funded by the bank sale. Total equivalent to c.6.3% market cap. Other: Tesco guide to FY26 capex of GBP1.45bn (FY25: GBP1.45bn) and tax rate 27% (FY25: 26.7%). BNPP Exane View: While the FY26 guide is 9% below consensus, multiple conversations post our note last week suggest the buyside was broadly around the number Tesco is now guiding to. While the guide does not cite Asda, the number and commentary leaves little doubt that Tesco has both the willingness and capacity to respond to any competitive escalation. Its commitment to the buyback illustrates its balance sheet strength, with material capacity to even the low end of its targeted range....
What happened? Asda has pledged to re-open a 5-10% price gap vs its cheapest full-line competitor (Tesco), and per their latest press release have now cut prices on 10,000 lines. Anticipating a response, we cut our estimates for both Tesco and Sainsbury (see last week''s detailed note Food fight - making cuts before the weigh-in). While things will likely play out over several months, late last week Tesco announced ''price cuts'' across hundreds of items with the tagline, ''We''ve not just cut prices. We''ve slashed them''. With our price analysis still heavily reliant on H.I. (human ingenuity/ignorance) we take on the more manageable task of assessing Tesco''s price cuts rather than Asda''s. Summary table below, but high-level takeaways: Tesco''s price cuts cover 288 items (c.1% of Tesco''s SKUs); the average price cut was c11% and the private label/branded split is c2/3 to 1/3 in favour of private label. On a sub-set of 42 items we compared with Asda, Tesco was still c.1% more expensive post the cuts (albeit a wide range of gaps), but more interestingly, only 2 items had seen Rollbacks at Asda. We also scanned the first 240 Asda items under the Asda.com Rollback tab (total of 4,155 on website - though we note many of these are multi-buy discounts on private label, not single item price cuts) - and found 8 of the 240, c.3%, were single item price Rollbacks on Asda branded grocery products (there were several cuts on private label non-food items and several private label items labelled ''Asda Price'' with not price cut mentioned), with the vast majority of cuts on branded products. BNPP Exane View: This is clearly early doors, but it does suggest that Tesco''s response will be measured and not tit for tat - we expect leveraging its customer data information advantage from Clubcard. We think it makes sense for them to focus on private label, where we believe long term investments mean Tesco has another competitive advantage Asda will find hard to replicate and...
Tesco delivered a strong Xmas LFL performance 3Q UK LFL of +3.8% (cons +3.6%, BNPP +3.5%) and UK Xmas of +4.1% (BNPP +3.0%, in line with cons, but ahead of buyside expectations post Kantar data), as well as performances over Xmas in Central Europe (+4.7% LFL) and Booker (+1.4% LFL), were positive surprises. Lack of guidance upgrade does raise questions, but we largely agree with the answers Tesco''s reaffirmed Retail EBIT guidance, implying c.0% growth in 2H (vs 10% in 1H) appeared conservative then and is arguably harder to understand after sales growth ex fuel in the first 19 of the 26 weeks in period was +3.3%, in line with the +3.5% in 1H. While we recognise that the investments behind this (availability, more staff in stores, prices, range) have led to the highest market share gains (+78bps last Q) ever seen from Tesco (and with minimal space growth), we do think: 1) it''s conservative - to temper expectations and reflect the inherent consumer uncertainty (we forecast FY25 Retail EBIT of GBP2.96bn vs guidance of around GBP2.9bn); 2) it should be read with an eye to the overall 5% full retail EBIT growth it implies - we think a solid aspiration for Tesco going forward; and 3) these investments do give us more confidence that Tesco can at least maintain its market share next year, despite the tough comp, underpinning a more sustainable investment case. Ultimately, consistency should drive further re-rating, which TSCO is positioning itself for With this note we tweak down our estimates to reflect profit guidance below our expectations. However, stronger than forecast sales over Xmas, driven by volume, with investments now in the base, mean we see Tesco being able to maintain momentum while following the industry in passing through operating cost inflation (which we believe it will). Our profit bridge (see overleaf) suggests our above consensus estimates are well underpinned in this scenario. Helped by topline growth, cost savings and retail media,...
What happened? Tesco hosted a conference call post the release of their 3Q-25 and Christmas trading statement. Key takeaways from the call are that:1) they still see consumer sentiment as neutral to small positive (same as in October, but has gradually improved over last 12 months); 2) the lack of upgrade to guidance, which implies c.GBP0m profit in 2H is driven by their decisions to invest in market share growth and long term value and due to market pressures; 3) management sound confident into next year, flagging recent energy and wage cost spikes that they have contended with in recent years - our conclusion being this implies they still expect to be able to deliver profit growth despite the uncertainties faced. Overall, a confident message, focused on building long term value for shareholders. While near term upgrades feel now less likely, today''s print and message point to strong underlying momentum and sustainable growth. Key highlights of the conference call were: On the consumer - while the battle to win customers is as ferocious as ever, Tesco see overall consumer sentiment as neutral to marginally positive - similar to when they last reported in October. They have been helped by price inflation stabilisation. On the maintained guidance - which implies c.GBP0m profit growth in 2H (vs +10% in 1H). Tesco has taken the proactive decision to invest in value, availability, and customer engagement/payroll hours. This has driven more market share growth than they expected (targeting 10s of bps of share vs +78bps of share in last 3 months, per Kantar). The CFO stated that if it delivers annual profit growth (implied at 5-6% retail profit) and cash then this is key. On next year - Tesco say they go into next year confidently. They highlighted recent cost pressures (energy, wages) which they have mitigated in prior years, through cost savings and growth. This to us suggests they expect to be able to deliver in FY26 despite cost pressure from higher...
Tesco^ (TSCO, Buy at 370p) - Decent trading, investing, no change to forecasts
What happened? Tesco released their Q3-25 and Christmas trading update with UK LFL in Q3 of 3.8%, which was 20bp ahead/below of consensus +3.6%. For the Christmas period (6 weeks to 4th Jan), UK LFL is 4.1%, in line with of consensus +4.1%. Booker LFL over the 19-week period came in at -1.3% vs cons: -0.9%, but over Xmas +1.4% vs cons -0.7%. Tesco reiterated previous FY25 guidance: Retail profit of around GBP2.9bn (vs BNPPe: GBP2.98bn, VA cons: GBP2.96bn) and Retail FCF - GBP1.4-1.8bn (vs BNPPe: GBP1.8bn) BNPP Exane View: Post Kantar data on Tuesday 7th, we think the market was expecting Xmas to come in below consensus in the UK, so would consider the headline LFL a beat. Booker''s acceleration over Xmas is also a relief. However, the unchanged guidance on profits and cash flow will temper expectations of this translating to upgrades and does point to a meaningfully lower profit drop through in 2H vs 1H. With this investment translating into share gains, we think it points to intentional actions by Tesco, rather than any change in market costs, leaving the investment case unchanged. Likely direction of consensus: We do not expect consensus to make changes to profit expectations post this print. Anticipated market reaction: We expect a broadly neutral reaction. The stock may trade off at the open, but likely recovers post call. Conference call: Tesco will host a conference call at 9am UK time. Valuation: Tesco trades on FY26e PE of 12.3x (5 year average 13.5x) and FY26e FCF yield of 7.9% (5y avg. 8.4%) Highlights from the release UK: Food sales +4.7% - primarily driven by volume growth. Suggests Tesco inflation well below Kantar industry number of c3% over last 12 weeks. Tesco reconfirm their position as cheapest full line grocery. Finest sales +15.5%. Online sales +10.9% (+11.5% last year, +9% 1H) Booker: 19 week catering LFL +2.8% (last year +3.5%, +10.1% ex Best Food Logistics; core catering +1.7% in 1H, BFL -6.6%) 19 week retail +1.3% (+4.1%, +9.4%...
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...
Tesco^ (TSCO, Buy at 365p) - Partial bond repurchase.
Firing on all cylinders as competitors struggle; consensus well underpinned; initiate at Outperform. Tesco looks as well placed as we have seen it in 15 years While Tesco has performed strongly YTD, we think its positioning, momentum and strategy have not been in a better place in the 15 years we have followed the stock. To summarise: its pricing vs the discounters has not been sharper; its balance sheet stronger and its market share momentum higher (now unaided by capital intensive store expansion). Competitively, we''ve not seen its full line peers so capital constrained, or the discounters adding fewer stores. On the regulation side, July''s CMA review essentially gave the industry a clean bill of health. While consensus margin estimates look well underpinned Against this backdrop, we see consensus looking for 5bps of UK EBIT margin growth in FY26e/27e, following c.40/20bps in FY24/25e. With our forecast that wage inflation will be c.30bps less of a headwind in FY26e than in FY25e and the cost savings programme expected to continue, our profit bridge suggests that with flat gross margins we see room for c.20-30bps margin expansion. Our forecast of 15bps in the UK, leaves us 2%/6% ahead of FY26e/27e EPS consensus. Valuation We value Tesco using a DCF methodology (8.5% WACC, 1% TG). We have a 445p PT and initiate with an Outperform rating. On our debt adj FCF to EV and returns based valuations Tesco screens attractively, while looking to the 10 years prior to 2012 we see a period when a strong Tesco traded on a 17x PE, a 30% premium to the market, vs our TP implied PE of 14.7x (c. 10% premium). Where we could be wrong Key risks are material step in price investments by a competitor; a shock to the UK consumer hitting volumes and driving trade down; a minimum wage increase above our expectations. Also see FOOD RETAIL: Great British Aisles published today.
Tesco^ (TSCO, Buy at 355p) - Modest upgrades -£2.9bn Retail EBIT "feels right for Tesco"
Tesco^ (TSCO, Buy at 356p) - H1 FY25F preview & meeting with management
We have adjusted our estimates following FY23/24 and Q1-24/25 results. Results were reasonably inline with our expectations therefore our forecasts are little changed. Due to the sale of Tesco bank earlier in the year, the largest change was made to the banks operating profit forecasts, where we now sit in line with guidance at GBP80m for FY24/25. We do not consider the changes to be material; our rating is unchanged.
Tesco^ (TSCO, Buy at 303p) - Q1 trading update
Tesco^ (TSCO, Buy, 310p) - Booker bolt-on acquisition and Q1 FY25F preview
Eagle Eye+ (EYE, House Stock at 470p) - Tesco: a new AI reference client!
Tesco PLC Eagle Eye Solutions Group PLC
UK Supermarkets - Disinflation versus deflation – Mr Murphy speaks.
Tesco PLC J Sainsbury plc
Tesco^ (TSCO, Buy at 288p) - Little beat, +11% DPS & bigger buy back, much to like
UK Supermarkets - Manageable inflation helps volumes
Tesco^ (TSCO, BUY at 277p) - Driving the compounding thesis
Barclays^ (BARC, Buy at 143p) - Tesco Bank... running the numbers
Tesco PLC Barclays PLC
Tesco^ (TSCO, Buy at 280p) - Excellent Bank Deal
Barclays^ (BARC, Buy at 143p) - Tesco retail bank acquisition
Initial Equity Trading Comments - 7 February 2024
TSCO PCA EYE EBQ FDP PSON WPP SBRY KYYWY
New Year Consumer Calendar - Travelling and arriving...
TSCO GRG SBRY
Happy to invest but also keen to offer shareholder returns When things are going well, there invariably comes a point to consider if ''that will do''. Whilst UK food retail is not the sort of market you can ever freewheel in, there will come a point where incremental investment yields limited returns; if you''re already the cheapest full-line operator, why do more? Tesco seems very happy with its ''great momentum'' over Christmas with UK LFL 70bp ahead of consensus and it is keen to hold or grow market share. But by delivering another profit upgrade, we see clear evidence that it''s investment won''t be endless. We maintain our Outperform. Carrying trading momentum into earnings upgrades Like Sainsbury''s yesterday, Tesco''s was very happy that a combination of focus on value and innovation landed well. The consumer is cautious, but with real wage growth back, there''s ''cautious optimism''. Either way, with very limited general merchandise exposure (c7% of UK revenue ex-fuel versus c20% at Sainsbury''s) Tesco could carry decent grocery momentum into earnings upgrade momentum, something Sainsbury''s and Marks and Spencer fell short on, this week at least. From high steady free cash flow to ''cash flow +'' We and others pushed on the outlook for 2024/25 and unsurprisingly, the group wasn''t being precise. It doesn''t expect deflation, in part as with the market rational, elevated wage inflation (min wage up c10%) will find its way to the shelf-edge. After c13% growth in retail EBIT in 2023/24, Tesco will likely do a lot less in 2024/25, but with at least some earnings growth, the investment ''algorithm'' isn''t a high but steady free cash flow yield, it is a high cash flow yield plus a little growth. More modest profit growth expected next year but an increasingly credible defensive We hike our retail EBIT forecasts to sit in line with the GBP2.75bn guidance and model c3% growth in 2024/25 and 2025/26. There''s still plenty of ''cut and thrust'' in the market but Tesco seems...
Tesco^ (TSCO, Buy at 296p) - Guidance nudged higher again!
UK Supermarkets - Was Aldi GB’s LFL volumes down in Dec?
Tesco^ (TSCO, House Stock at 286p) - High-class management, high-class equity
Initial Equity Trading Comments - 18 October 2023
TSCO WTB SBRY OBD UJO MTRO HSW CBOX SGRO MSLH
Tesco Bank
Tesco PLC SDX Energy PLC
Tesco^ (TSCO, Buy at 276p) - Is the Bank for sale?
Tesco PLC Next plc
UK Supermarkets - Stable volumes, online bounce & leverage counts
In H1 FY23/24, Tesco’s sales and operating profit were ahead of the market expectations – largely attributable to the UK & ROI segment. The company is well-placed to preserve its market share gains and profitability. The weakness in CE is non-structural. The improvement in the annual outlook (for retail operating profit and FCF) is reassuring. We continue to see Tesco as one of the healthiest of the lot. We will increase our financial estimates slightly. Positive recommendation maintained.
Yes, food retailers can grow profit... even as the market disinflates Our investment thesis on Tesco (and for that matter, Sainsbury''s and Ahold Delhaize) is predicated on dependable, high single digit free cash flow yield. The pushback has been the absence of growth and as bond yields have moved higher, even we have discussed whether ''boring'' is enough. With retail EBIT 5% ahead of consensus and up 14% year-on-year, Tesco''s H1 results show food retail need not be no growth and regardless of disinflation, earnings can positively surprise. There are of course boundaries, but the story is better than simply being a bit boring. No one factor driving the momentum... which is reassuring In some respects it would be nice to dig into the reporting and pull out one factor which drove the beat and profit growth. Unfortunately, disclosure remains limited so that''s not possible but even if we had sight of for instance gross profit, improvements won''t simply be down to just say, price. There''s mix for instance and the group also spoke to better-than-expected volumes. Market share losses at ASDA and Morrisons are no doubt helpful, but the consumer outlook seems less bleak. Revised guidance seems sensibly prudent, we sit just over the top end of the range We, and certainly Tesco, are mindful of the dangers of over-promising and under-delivering - in a sector like food retail, reputation matters. Accordingly, to only ''bank the beat'' into guidance is understandable; from cGBP2.5bn of retail EBIT, the group is guiding to GBP2.6-2.7bn so at the mid-point, the uplift from H1. Even so, notwithstanding something totally unexpected (after the last few years... who knows), we think the group can deliver at or even slightly over the top end. Times have changed with a strong balance sheet and virtually no-offs Whilst we realise it''s a little unfashionable, the balance sheet deserves some attention too. The group is at the bottom end of its leverage range (2.3x...
Tesco^ (TSCO, Buy at 260p) - H1 24 results – strong beat and upgrades
Initial Equity Trading Comments - 4 October 2023
Tesco PLC DSW Capital Plc
UK Supermarkets - One of the greats is to leave Morrisons
UK Supermarkets - Summer sun, eventually...
Tesco^ (TSCO, Buy at 257p) - Strong execution drives grocery upgrades
UK Supermarkets - Inclement summer dampens sales momentum
Tesco^ (TSCO, Buy at 248p) - Announcement of the appointment of a new Chairman
Tesco’s Q1 trading performance was slightly ahead of the market’s expectations. The group’s sales grew 8.2%, 190bp ahead of the consensus. While the UK & ROI and Booker segments outperformed the street’s expectations by 200bp and 540bp, respectively, Central Europe was much softer at +1.1% yoy. We continue to see Tesco as the best-placed full-value grocer in the UK to defend its market share. Central Europe softness is also non-structural. Management has maintained the annual guidance. We retain our positive stock recommendation.
Tesco^ (TSCO, Buy at 263p) - Q1 preview
Tesco^ (TSCO, Buy at 267p) - Resignation of Chairman
A year unlike any other but Tesco still made guidance In April 2022, Tesco set its sights on delivering GBP2.4-2.6bn of retail EBIT in 2022/23, today it reported GBP2,487m. To say there was a lot going on in-between is an understatement and when margins are this low, it could have gone very wrong; we estimate Tesco faced GBP5bn of cost pressure through the year. To finish the year almost perfectly in the middle of it is guidelines demonstrates a journey that is remarkable for being unremarkable. Tesco and the wider food retail industry seems to be reformed. We reiterate our Outperform, holding our 330p TP steady. Societal pressure to keep profits pinned back In our recent sector note, we set out the reasons why we think the food retailers are now a lot more investible and hidden in the depths of the messaging today, the tone on the consumer seemed to be a little more optimistic than it was in January. Falling cost pressure and robust wage growth seem to be taking the edge off what seemed to be a bleak outlook albeit, we must acknowledge some consumers are still having to make some very tough decisions and there is societal pressure on Tesco to do what it can to mitigate at least some of that pressure. But in time, profit growth opportunities are there, if only with a little g Now then does not seem to the be the point where Tesco or indeed, any other European food retailer will be sanctioning material profit upgrades, but could there be at least some profit growth, if only with a little ''g''? At the net income level, we doubt it; a higher tax rate is a headwind in 2023/24 but thinking further out as societal pressure to grow earnings eases, Tesco is again talking about opportunities from media income, even if the group is still reluctant to put figures to it. Cutting forecasts for higher tax rate We leave our EBIT forecasts mostly unchanged and think the group can do a touch better than its guidance of broadly holding retail EBIT flat in...
Tesco’s preliminary FY22/23 performance was slightly ahead of our as well as the market’s expectations. The group’s lfl sales came in at +5.1% (+94bp vs consensus), with positive momentum in all business segments. The adjusted operating profit of £2,630m (-6.9% yoy) was in line with the street’s expectations. For FY23/24, we expect Tesco’s top-line growth to moderate, volume to recover slightly and profitability to decline slightly. We maintain our positive stock recommendation.
Tesco^ (TSCO, Buy at 267p) - FY23 preliminary results - slight beat from cash compounder, scope to nudge up FY24
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 under pressure. We maintain our positive stock recommendation.
In control of its destiny. Tesco remains our most preferred It says a lot about Tesco (and Sainsbury''s yesterday) that despite billions of cost pressure - more than they could ever hope to even touch with cost saving, let alone offset - they will finish 2022/23 with the EBIT they targeted at the start. Indeed, except for Colruyt, this is a theme across food retail. Investor anxiety is high given ongoing cost pressure for consumer and company. But if markets were rational in 2022 and cost pressure is likely to ease in 2023, at what point do you become more constructive? With a 9% free cash flow yield, Tesco remains our most preferred. Consensus seems to have been de-risked for 2023/24 asking for only flat EBIT We''ll have to wait until FY results (13 April) for more precise guidance from Tesco on 2023/24 but it seems to us that consensus has been de-risked asking for only flat retail EBIT. Though we''ve no doubt you can find better profit growth elsewhere, a much sharper focus on capital allocation means cash conversion has improved sharply and even with our more cautious definition, we think Tesco can comfortably deliver GBP1.5-1.6bn of free cash flow next year after GBP1.8bn this. With a buyback (we pencil in GBP750m in 2023/24), there is tangible payback from a lot of heavy lifting. A very rational market where it is easy to identify losers The market of course fears consumer spending. With 7% LFL growth in the UK, Christmas seems to have again been an island with the consumer now retrenching. But it is a familiar message and with trading down from dining out and so higher margin premium ranges, there are opportunities too. But it''s also a market where it is easy to identify losers (Morrisons of late, we think a poorly differentiated ASDA will lose its recent momentum) and crucially, rational behaviour. Nudging up TP on better cash flow and unwind of discount Market structure remains the most important question to answer in food retail and in...
Tesco Ireland photo-pack - Sandymount, Dublin refit Sandymount (Dumhach Thra) is one of the finer districts of Dublin, a city that evolved into a international place of self-confidence, whereas its nearest neighbour, the United Kingdom looks something of a world where the lunatics have literally taken over the asylum. On a recent visit to see investors and friends in Dublin, Shore Capital Markets took the time to also visit a refit of the modestly sized Tesco supermarket in Sandymount, one that in recent times has looked a little tired, especially given the considerable household wealth surrounding the 'village green'.
Tesco had a good H1 FY23 and, to us, is executing well bolstered by a strong balance sheet (asset-backed, a good pension position and low non-lease net debt). That said, with concerns over the consumer environment and operating cost headwinds (labour and energy) we confirm our previously communicated downgrades to FY24 (flat on FY23). Despite reduced forecasts, Tesco’s stock appears undervalued on an FY24 PER of just 10.4x, an EV/EBITDA multiple of 6.9x and a FCF yield of >8%. However, the problem for us is the robustness and visibility of forecasts, set against a UK economy going into recession with tax rises, spending cuts and elevated borrowing costs. Frustratingly, we keep a HOLD stance for now.
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 attractive, we have trimmed our near-term EPS forecasts.
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.
Q1 FY23 trading update preview – inflation & all its implications…
We expect Tesco to deliver a very good FY22, which it has just completed, so no change to our forecasts, with free cash generation expected to be very strong (>£2bn). The Group will update on its surplus cash strategy through its April preliminary results. For FY23F, we believe we have been too optimistic on our base expectation for Tesco Bank, whilst we observe elevated energy costs, in particular, with caution. Set against an expectation that Tesco UK is not going to over-inflate in the manner prior regimes did through the Great Financial Crisis (so letting in the German discounters), we are downgrading our FY23 CPTP estimate as a precaution by c£87m (c4%). We have not been guided down, this is our view, one where we expect many British companies to meet FY22F but perhaps appraise pre-Ukraine invasion estimates here on. All this said, Tesco is an asset-backed, effective-operating free cash generator where the buyback programme should continue whilst the dividend is secure (FY22F yield 3.9%). BUY.
Issuer Sponsored QUADRISE FUELS+ (QFI, 2.16p, House Stock) – Appointment of Non-Executive Chairman FTSE 100 TESCO^ (TSCO, BUY at 297p) Operating adjustments to cut costs – closing Jack’s and further counter rationalisation FTSE All share AG BARR+ (BAG, House Stock, 496p) - Trading beyond pre-Covid levels, excellent cost recovery and cash generation NWF GROUP^ (NWF, Hold at 214p) – Strong H1; FY22F outlook and forecasts unchanged. AIM DSW CAPITAL+ (DSW, House Stock at 119p) – Empowering professionals DUKE ROYALTY^ (DUKE, Buy at 38.5p) – A record quarter SURESERVE GROUP+ (SUR, House Stock at 90p) - Another ten-year contract announced WARPAINT LONDON+ (W7L, House Stock, 154p) - Strong trading drives a beat to FY21 expectations Cross Sector SHARE & SHARE ALIKE – The Year of the Tiger – Docile or volatile?
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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 and target price.
Tesco more than delivered for us; where should we rerate it to? Our cautious stance heading into Tesco''s H1 results was misplaced. Though the group issued subdued H2 guidance (fairly flat versus H2 2019/20) after a strong H1 (21% ahead of H1 2019/20) as we expected the broader messaging more than compensated. A new GBP1.4-1.8bn free cash flow ambition was the highlight; at the middle of the range, the yield is c8%. Having had a frustrating wait, it seems a rerating is under way. The question then is, what is the right multiple? Our new 345p TP still isn''t shooting for the stars Given the willingness to issue free cash flow guidance, we now think Tesco''s rerating can be bigger. Our preferred valuation approach is EV/EBIT and if you put Tesco UK on the same multiple as Ahold Delhaize (15.3x 2022E), you''d derive 355p. If you wanted to aim higher, Unilever (390p) or Walmart (450p) would be living the dream. There is of course the obvious point that Tesco still needs to execute against the plan but if we aim for a notch below Ahold Delhaize (15x), we hit our new 345p TP (from 310p) which would equate to a c6% FCF yield at the mid-point of guidance. Cheap and cheerful - an attractive combination in food retail The track record for making money buying cheap food retailers is mixed; its often earnings that are wrong, typically because of price competition. There''s no doubt there''s plenty of inflation and disruption around which poses a risk. However, we remain of the view the UK market is rational with private equity ownership likely to make it more so. Tesco is also outperforming, and sales momentum tends to stick in food retail. Tesco is cheap, cheerful with best in class ESG credentials. Growth comes with a small g but that''s not the call; it is capital into cash flow Though Tesco took the time to talk up its earnings opportunities during the presentation, notably supplier income, big margin moves are not an aspiration. Earnings growth is...
A cautious outlook might be the focus from H1 results, 6 October From afar, food retail is a space where you should be able to take a two-week holiday and not worry about your holdings. Not Tesco. Whether it be a bout of price competition, concerns on capital allocation or more lately, missed or even own goals on cash return, the story has been frustrating. With a new CFO at the helm however, the ambition seems to be making the story for investors a lot easier. We have confidence it can be, and the shares can re-rate further in the next 12 months. A cautious outlook though seems likely at the H1 results on the 6 October. We navigate the agenda. H1 was good but we expect the tone for H2 to be cautious H1 was very good for Tesco. Market share gains for a mature market leader are rare in food retail yet a combination of Aldi price matching / Clubcard exclusives seems to be stemming market share loss to discounters and winning share from ASDA, now owned by private equity. We think private equity equates to more benign conditions - good news when cost inflation is high. The H2 outlook is likely to be cautious however given the building inflation story and supply chain disruption. We think the group can finally put to bed uncertainty on the capital framework Whilst Tesco can''t fully control the cost environment, it can do a good job of making it seem easy even though we know things like labour shortages in HGVs or deeper in the supply chain (e.g. staff in abattoirs) aren''t. What Tesco can control however is capital allocation and cash return. We think some new lines in the sand are probable (3x lease adjusted net debt / EBITDA rather than 2.5?) helping us better model the timing and magnitude of cash return. We would though be surprised if the group openly guided to a free cash flow ambition like Sainsbury''s or Carrefour. Online and medium term growth opportunities probably in focus too Falling online penetration takes the pressure off online...
Tesco displayed understandable caution with its FY22F guidance in spring 2021 and the overall environment still contains fragility and uncertainty, e.g., industry operating costs. Whilst so, we believe that the Group has had a strongH1 and we feel it appropriate to upgrade our expectations for Tesco Retail EBIT by c.5%. We expect Tesco to set out the basis of a refreshed Group capital allocation strategy in its 6 th October interim results, although we do not anticipate any distributions to commence at that time. We reiterate our long-standing view of Tesco as cash-compounding business where earnings growth, income and shareholder friendliness can drive rating expansion. BUY.
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.
When the market''s optimism has gone, ours ticks up Price competition and high expectations are probably the two biggest enemies of the listed food retailers. With Tesco''s free cash flow yield at c.8%, it''s hard to argue that investors have high expectations for the business. We ponder then why the shares are down on a trading beat. Perhaps it was the lack of earnings guidance upgrade (flat retail EBIT versus 2019/20), perhaps it is fears of cost inflation or maybe the ''whisper'' was higher? Regardless, low expectations are often an opportunity and we think Tesco''s H1 results (6 October) could be the potential catalyst. Inflation is a worry for some but we and Tesco seem more relaxed At present we see two big short-term questions for Tesco; how does the industry manage cost inflation and what is the right capital framework. It''s ironic that in some cases (Kroger yesterday for instance) management teams seem keen to actively embrace the prospect of inflation (it keeps the PandL ticking over) whereas in others, the market worries about passing it through (UK food retail). We''re minded to look at inflation as more of a neutral - what Kroger misses for instance is its cost inflation before it hopefully hits the shelf-edge. The tone from Tesco however sounds relaxed. H1 results; a clearer capital framework and potential for an earnings upgrade We stick firmly to our view that the target for a capital framework is in many respects academic; whether it''s 2.5x adjusted net debt / EBITDA or 3.0x, the cash won''t just disappear (it''s in the share price or in your pocket). Consistency however is key and it has been lacking. We expect to hear a more definitive message at the H1 results by which point some of the macro uncertainty should have revealed itself more. Given the latter is the principal reason for the cautious guidance, we could get an earnings upgrade too, helping finally put a bit of positive momentum into consensus. Small tweaks to forecasts,...
Tesco has announced its trading performance for Q1 FY22, the 13 weeks to the 29th May. We see this update as sound and consistent with our FY22 EPS expectations. Still quite early in the current financial year, we are not adjusting our EPS forecasts, and as such, we would be surprised to see much movement around consensus at this juncture. Accordingly, a frankly dull stock in recent times is unlikely to offer a notable catalyst for rapid share price appreciation in terms of near-term upward earnings momentum albeit we continue to see a free cash flow yield of 8%+ (with most of that resource going to shareholders in one form or another) as representing good value. We reiterate our BUY recommendation.
Tesco will issue FY22F trading data on Thursday 17th May. This update is likely to be the only engagement with the market until its interim results in October. We point out that amidst pandemic influenced trading conditions, that current one-year sales is not the only metric to consider at this time, so keep in mind the two-year sales stack, the change in online grocery participation and the direction of travel on COVID costs, mix and working capital.
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.
Negative LFL, online, cash return disappointing... what''s to like? LOTS! With even Tesco encouraging customers to get back to the pub, it seems the peak sales uplift from COVID-19 has passed. Attention shifts to the longer-term consequences and how the sector trades as we move through negative LFL. On the latter point, we won''t hide our nerves but we''re happier to start at the low multiples that Tesco trades on. On the former, online is the obvious point and we think Tesco has a good story (strong locations, data analytics to help gross margin). It can also more broadly capitalise on strong customer metrics. The story just calls for some (more) patience. Could Tesco have a VW moment? An investor asked us today, can Tesco be like one of the conventional car manufacturers? Having been pounded by a view that electric vehicles were the future, it turns out the incumbents are the market leaders and the likes of VW are up 60% in 3 months. Could we apply the same to online grocery? When the likes of Gorillas or Getir are raising funds at very high valuations, why doesn''t Tesco (and others) get more credit? We maintain our view that the online story isn''t a black and white ''it loses money'' and Tesco has a better story to tell than most. It just needs to tell it. Disappointed again on cash flow guidance With a new CFO waiting in the wings, perhaps we shouldn''t have expected much commentary on cash generation and use. Even so, we are disappointed the company wouldn''t even sanction our medium term estimate of GBP1.5bn of free cash flow on the call. We think though the market is rational and we have confidence in the forecast offering strong down side protection we think. Asking for a little more patience but still think it can come together The shares today have to process subdued guidance (retail EBIT flattish in 2021/22 versus 2019/20) but we think Tesco is likely keen to under-promise and over-deliver, particularly with a new CEO. The bank...
The shares won''t look after themselves; what to say differently to reflect a job well done? A lot went right in Tesco''s 2014-2020 yet from a shareholder perspective, performance was disappointing - the shares today are essentially flat from when Dave Lewis took over as CEO in September 2014. Having been in the role for 6 months, Ken Murphy, Tesco''s new CEO must be very aware that even when things are going right operationally, the shares won''t look after themselves. So what needs to be done and said for the shares to finally reflect a job well done? Tesco should pitch itself as a predictable good citizen It''s pretty common for an incoming CEO in food retail to ''reset the PandL'' but in this case, we see little need; performance seems solid. The shares though seem to have paid the price for a perception that the story has ''over-promised and under-delivered''. Collectively we all have to bear some responsibility, be that giddy expectations on synergies from Booker, or misunderstanding or miscommunicating capital targets. However, a new CEO offers the opportunity for a communication reset... Tesco; a predictable, good citizen with cGBP1.5bn of free cash flow? The market is craving a consistent and definitive capital framework Having set a capital framework steering us we thought to cash return we''ve seen Tesco move the goal posts twice and more lately, disassociate a capital target with capital return. The ''good news'' is that the bad news is out of the way; Tesco probably won''t announce a cash return on 14 April (FY results). It can however set a clear and definitive capital framework, even if the new CFO is joining in May. We think amount and timing are secondary to consistency and greater predictability. Tesco has a better narrative than most for online - it just needs to share it more The other big question and probable brake to the share price is online grocery. It''s ironic that the food delivery names are falling over themselves to get...
Tesco is coming to the end of a tumultuous FY2021 in good shape and heart, in our view. Ken Murphy, the Group's CEO, will no doubt chronicle a remarkable year for the business, one in which it contended with the challenges and opportunities posed by the pandemic, completed the Asia disposal, and further underscored Tesco as an industry leader. Following a call with management, we leave our FY2021 CPTP forecast unchanged, though tweak down EPS to reflect post-consolidation share numbers, looking for 16.1p (excl. business rate payment). Looking to the future, we anticipate initial strategic continuity between the Lewis and Murphy regimes. However, whilst the strategy may evolve over time, we expect the fundamentals to remain centred on a capital disciplined cash compounder, focusing upon free cash flow generation and returns to fund a progressive dividend policy and share buy-back programme. We forecast a flat year-onyear DPS of 9.15p, assuming a temporary dip in cover given the exceptional year. On a FY2022F PER of 11.2x, we reiterate our BUY stance on defensive Tesco.
Might a highly levered ASDA be an opportunity too good to miss? For some time, our thesis on Tesco was that it was moving into a stable margin, cash generative, dare we say dull phase. But circumstances change. COVID-19 is still a material uncertainty and seems likely to disrupt the new financial year - we trim forecasts as it is likely to be a net negative for earnings. But rather than being a ''cash compounder'' and returning funds, might Tesco find a better short-term use for some of its excess capital? Having argued there''s not much price elasticity in the market, a soon to be levered ASDA may be an opportunity too good to miss. ASDA won''t just roll over but it is already under pressure The first thing we''d say is that under new management, ASDA isn''t about to simply roll over. But the reason ASDA was sold for a low price (c10x EV/EBIT) is, we think, that it is tightly squeezed between discounters on one hand and a strong group of mainstream competitors at the other end. We think the main reason people go to ASDA is either there isn''t an Aldi or Lidl nearby (or if there is, it''s very busy) or for cheap brands. Tesco''s Clubcard Prices (brands at discounts) already seem to be undermining the latter point so Tesco could do a little more, particularly with supplier support? Could Tesco be forgiven for again deferring cash return? Does a new management team get credit for returning cash an old team generated? On the one hand it reinforces the sense of continuity and confidence in the future but it is also an admission other options are limited. Tesco has seemed close to returning cash before, only to disappoint when goal posts were removed so it needs to tread a fine line. But in a scenario where it perhaps turns up the margin investment dial a touch and gets a decent return, investors should be forgiving. Having pencilled in a buyback for the new financial year, we now remove it Having pencilled in a GBP500m buyback for 2021/22, we cut it...
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.
Good prices for consumers, good prices for shareholders We suspect some might dispute the claim that Tesco ''won Christmas'' in the UK (Lidl for instance reported 17.9% sales growth, most of which is LFL). Either way, +8.1% LFL is clearly very strong but should of course be seen in the context of exceptional circumstances that lifted all boats. Though the outlook is (hopefully) one of normalisation, the set-up seems strong with Tesco''s value credentials for both customers and shareholders compelling we think. Tone on price investment remains comforting One of the concerns on the equity thesis remains pricing pressure from the discounters and it could be argued that Tesco''s Aldi price match is lighting the touch paper to a period of deflation and margin pressure. Tesco however seems keen to sound much more conciliatory; we''re not after Aldi...we''re just trying to remove a reason not to shop with us. It''s those sorts of remarks which reaffirm our view that the UK food retail landscape is relatively benign, albeit at times noisy. If you can build confidence in that, you can build confidence in earnings and cash flow. Online profitability remains a concern but we hope to build confidence in 2021 Online remains one of the other barriers to investing but the group thinks that over time, the gap in contribution margin can be closed. There remains a credibility gap here for the industry - in short, we need detail. However, we think 2021 will see more colour. Elsewhere Booker is feeling the challenge of wholesale and Central Europe was impacted by curfews. But these feel transitory and market weakness is normally something big players can capitalise on. Eyes now on the share price performance post the special dividend We''ve nudged down our estimates for Booker''s performance in particular but the change is pretty small. Eyes now on the share performance post the c50p special dividend (due around 26 February). The shares will look markedly cheaper as...
The market share data from the likes of Nielsen continues to yield encouraging news for the British supermarkets; four-week (4W) sales growth of 6.9% is way ahead of our January 2020 expectations for the sector. We anticipate strong Christmas 2020 demand for the UK grocers and whilst CY2021 poses comparative and maybe UK-EU operating challenges, working from home and capacity reduction in the Food & Beverage (F&B) channel make for an elevated two-year sales stack, with a sound outlook thereafter. The industry is competitive, albeit inflation at c1.0-1.5% persists, but operating costs remain under attack; see Sainsbury’s recent actions. Accordingly, with negative working capital and capital discipline, we see a sector displaying strong free cash flow (FCF) generating capabilities, that leads us to suggest undervalued equities. Indeed, if double-digit prospective FCF yields persist we see major take-out activity, and Tesco is not too big to be shielded from such activity. OVERWEIGHT.
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The best way to tackle the bear thesis is consistency... patience can bring reward The ''it is duller than you think'' investment thesis has served us well in the past and though it might not get the juices of everybody flowing, history would suggest that for investors, it can work well. It''s not to say Tesco is devoid of opportunity. However, when the shares are held back by fears on what price competition and online might do to the industry profit pool and cash flow, steady and consistent delivery is the best counter and potentially the most exciting win for the shares. Following H1 results last week, we update our thoughts on the key price and online debates. A noisy pricing environment but there''s little logic in a price war If the bears are right on price competition in the UK then it has the potential to be much more damaging to the industry profit pool than online. But ask yourself this; what''s to be gained? If the UK food retail market is all about price, why is Aldi struggling to hold share despite c7% p.a. space opening? Data suggests price elasticity is very low in the UK. We doubt a price war is coming. Online is a major focus but we should at least focus on the ''less bad'' The reason Aldi is losing share is the lack of online proposition we think. Though it may be trialling options, we''d be surprised if an already low cost, low margin business could digest a large scale online business, even click and collect. Meanwhile, the rest of the industry is making progress with Tesco highlighting the positives of click and collect or automated picking. With penetration already high, much of the negative is already in the base and if Tesco can focus on at least reducing the loss, penetration can move higher with profit potentially growing. We flesh out some thoughts. A good start from the CEO - we doubt the story is about to be upended We thought Tesco''s new CEO, Ken Murphy, did a good job last week. It was particularly encouraging to...
Dave Lewis is in the final furlongs of his tenure as CEO of Tesco and he passes the baton onto Ken Murphy with his business trading strongly, demand bolstered by remarkable behavioural change through H1. In the face of enormous upheaval, a material cost spike and a loss-making Bank, Tesco has clearly delivered very strong trading momentum, which has allowed management to now focus upon mix and cost to beneficial financial effect. With the Asian disposal set to emerge mid-H2, we put through small (+3%) upgrades to our FY2021 CPTP expectations and keep our BUY stance, reiterating our expectation of strong cash generation on a sustained basis (FCF yield FY2022F-2023F average >10%), which can and will benefit shareholders with the Group leverage target of 2.5x forecast to be achieved in FY2022. A normalised FY2022F PER of 10.2x and EV/EBITDA multiple of 6.2x are too low, in our view. BUY.
Tesco’s Q1 FY2021 trading update unsurprisingly confirmed robust trading momentum, driven by the shift of calorie consumption into the home from out-of-home, whilst also confirming a significant step up in costs (H1 weighted) to manage through the Covid-19 crisis. Helpfully, management was able to provide some clarity on its profit expectations for FY2021, with Retail guided flat year-on-year and significant book losses in the Bank (£175–200m). With guidance on board, we reintroduce forecasts for Tesco which point to an EPS decline in the current year of 11%, followed by a sharp rebound in FY2022 and further growth thereafter. Tesco’s cash flow credentials are also clearly to the fore, and with leverage targets soon to be met we see scope for all of the double-digit postcapex FCF yield to be returned to shareholders on an annual basis, through dividend and buy-back activity. A 10.5x FY2022F PER and 6.5x EV/EBITDA multiple look undemanding in our view, and we upgrade our recommendation to BUY (from Hold).
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.
Dave Lewis is leaving Tesco in much better shape. COVID-19 could well do the same Tesco is quite rightly mindful not to look at COVID-19 as a positive but away from the personal suffering, it seems likely that the group and Big 4 UK food retailers will exit the crisis in a stronger position than they entered. Reflecting on his last (near) 6 years in charge, Dave Lewis, the outgoing CEO told a story of progressively removing reasons to shop elsewhere (notably Aldi) and the crisis seems to have reinforced that story. We think the business he leaves is in a much better position with sustainable cash generation the result. At some point, the shares will catch up. An extraordinary period for trading but Q1 is history you wouldn''t extrapolate from In what was clearly quite an extraordinary Q1, it doesn''t seem to matter that Tesco''s UK LFL was a little under expectation (8.7% versus 10.5% consensus) when other bits of the business were much better (notably Booker at +0.6% versus -14.4% consensus). Further, the outlook of flattish retail profit was reiterated. We still think that sounds cautious but having been top of consensus, we trim our retail EBIT forecast 5%. However, we still have 7% growth in retail profit year on year. A cautious message on the bank but we don''t think that exciting for the shares The message on the Bank was much more cautious; against us and consensus pencilling in a GBP15m loss this year, the new guide is a loss of GBP175-200m. Accordingly, there''s a reasonably large cut to consensus to come (c7% to EBIT at the mid-range). However, we''re minded not to base a thesis on 2020/21 profit, particularly as IFRS-9 creates volatility in bank earnings. Our forecasts for 2021/22 are in contrast little changed, the small cut reflecting minor revisions for the bank (note we value it on P/TBV so there''s little impact on our group TP). Tesco doesn''t seem to be lining up for a fight on price - a positive for all Heading into the rest...
Tesco last updated the market on trading amidst the full heat of the Coronavirus crisis, when FY2021 guidance was curtailed leading us to withdraw our forecasts. A focused Group with Poland now leaving the business may provide the basis for estimates to resume through its Q1 FY2021 trading statement; we expect to at least provide a central scenario. As to Q1, we expect very strong grocery retail sales, weak catering activity within Booker and poor general merchandising sales. In all, we feel Tesco may signal to better than flat year-on-year Retail EBIT, excluding its IFRS 9 burdened Bank. We are warm to capital disciplined and free cash generating Tesco, let's see if we can become warmer still post next week’s update? HOLD
Shore Capital recently staged a conference call with Tesco's Chief Finance Officer, Alan Stewart, and Director of Investor Relations, Chris Griffith. As may be expected, no current trading information was discussed, noting that Tesco has withdrawn FY2021 financial guidance in light of the considerable business and economic uncertainty surrounding the Coronavirus crisis albeit indicated that, the Bank aside, Retail trading profits, taking the potential costs associated with the Coronavirus crisis into account, could be flat year-onyear. Following the Group's FY2020 preliminary results, which were issued on 8th April, Shore Capital withdrew our FY2021 Tesco financial earnings estimates and brought our recommendation on its stock back to a HOLD. We will seek to re-commence sensible forecasts as soon as possible, noting that the Group next updates on trade through its Q1 FY2021 trading statement on 26th June.
The BRC-Shopper Trak Footfall data for March brings with it few surprises in a time when it is now reasonably hard to shock with appalling numbers due to the transformation in expectations and numbness of repeated numerical body blows that the lockdown has brought to UK retailing. Whilst so, this data allows us to introduce our expectations for the timeframe that lockdown may impact earnings for much of the UK consumer economy.
Last week, we wrote of a potential shift of food demand in the UK from the out of home Food & Beverage sector to Retail. By Friday eve the Prime Minister had closed all the pubs with a lockdown of sorts announced on Monday. The British food system is now in a new norm, a temporary one the length of which will be determined by the trajectory of the invisible Coronavirus. In aggregate the industry has done wonders to meet the demand challenges with a number of organisations probably ‘butter side’ up from a financial perspective. Whilst so, it is far from universal with F&B taking a battering and food to-go, food for now and food on the move (note Gregg’s close down) notably down. With lots of uncertainty about how Easter will pan-out and higher operating costs, we would say that four weeks in from a financial perspective the food system is '2-1' up (maybe even an away goal) but no more. The length of the game is uncertain. Whilst the earnings impact remains to be seen, we highlight the probable notable boosts in time to cash flow from operations from these negative working capital business models, although we are keeping an eye on fuel impact. Improved liquidity and solvency is enough for us to reiterate our positivity on Morrison, Sainsbury and Tesco.
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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.
Tesco has announced yet another bold move to stay afloat / preserve market share in the tough UK grocery market – management plans to price-match Aldi on hundreds of essential products. Improved price perception is the aim but profitability erosion is also a likely side-effect. While Tesco is better placed (enjoys 2x operating margin) vs close peers, this step may not be enough to plug the customer leakage completely. The competition will only intensify henceforth.
Tesco is evaluating the strategic options for its Asian business (Thailand and Malaysia) after being approached by a buyer (name undisclosed in the press release). In our opinion, Tesco is not desperate to dispose of the Asian operations at the market rate / small premium. Hence, we would not be surprised if an attractive valuation is offered, if the transaction is concluded – at least 1x EV / Sales multiple, pegging the value north of £5bn.
Tesco has made a brief and surprise Sunday statement, reiterated this morning, that reveals a review of its operations in Malaysia and Thailand, after receiving an approach for the businesses. Tesco also states that the review is at an early stage, no decisions have been taken and that a deal to sell may not transpire (no timeframe for the review has been indicated and in particular whether its outcome involves designate CEO, Ken Murphy).
Tesco is well into H2 2020 and appears to be in pretty good shape, in our view. The announcement of Dave Lewis’ pending departure was a surprise, for sure, and no doubt until his replacement, Ken Murphy is in place and understood, there is an additional risk factor of sorts. That said, we expect Chairman, John Allan to have undertaken a diligent selection process and so we await Mr Murphey’s arrival calm and with interest. More broadly, we see Tesco as having a well-set team, executing largely effectively across the board; from grinding out a living in the competitive UK grocery scene to seeing through growth opportunities, particularly in Asia and UK foodservice (Best Food Logistics) whilst a turnaround is in play in Central Europe. Much remains to be done but we can foresee a gently building cash compounder with sound EPS & DPS growth (3-year CAGR FY2019- 2022) of 11.5% and 25.7% respectively, and scope to generate FCF to reduce leverage, provide acquisition optionality and be shareholder friendly. Such ‘stuff’ is the thing of rating appreciation in our view. BUY.
The H1 performance was better than our expectations – top-line was soft but operating profit outperformed. Management has announced an overhaul of the Polish operations (after scaling down the business). The discount format Jack’s is producing mixed results, although the CEO is optimistic for its future. Dave Lewis will be leaving Tesco next summer (due to personal reasons). Kevin Murphy, whose recent stint was with Walgreens Boots Alliance (as the Executive Vice President and Chief Commercial Officer), will take the helm.
Tesco is due to release its H1 results tomorrow. In addition to the company’s performance in the UK, it will be interesting to hear management’s commentary on two hot topics: its discount format Jack’s and the strategy in Poland.
Aldi UK & Ireland (UK&I), noting a c12% share of the latter market, has made comment on its FY2018 financial performance, whilst providing some guide to its future plans in Great Britain. In a nutshell, in FY2018 the German discounter revealed a strong sales performance, manifested in the monthly market updates from the likes of Nielsen, but a notable contraction, some 50+ basis points (bps) as operating margins compressed from 2.62% in FY2017 to 1.74%. Such a contraction in margins is highly notable to us and shows the struggle that Aldi UK&I has had to engage in order to sustain sales and share growth; put another way, it would be material and quite negative news for shareholders if its major competitors were reporting such a fall in trading profits (PTP fell from c£221m in CY2017 to c£182m in CY2018).
Tesco will report post-IFRS 16 interim results on the 2nd October 2019. In this note we outline our financial expectations for H1 2020, and how that feeds into our FY2020 expectations. Tesco hosted a successful Capital Markets Day (CMD) in June, supported by an effective ESG event, whereby the priorities of the group were set out by CEO Dave Lewis around quantum sales growth, maxing the mix and a focus on costs to drive cash profitability. In doing so, already robust solvency ratios are set to further improve, and the visibility and sustainability of the dividend should positively develop, noting the guidance for 2.0x EPS cover by February 2020. We forecast H1 CPTP of £948m, year-on-year growth of >30%, whilst for the full year, we continue to forecast c12% growth to £2,020m. Large, liquid, defensive and growing, forecast to yield 3.7%, we reiterate our BUY recommendation, noting our forecast for an advancing FCF yield to >7% in FY2021.
French domiciled Carrefour, subject to its own transformation programme and now in a buying alliance with Tesco^ (TSCO, Buy at 227p), has revealed interim CY2019 results. In line with the new British Prime Minister, the narrative is quite upbeat, the firm either being largely in-line or ahead with its CY2022 change programme; that's where cross-overs with the UK political economy ceases.
To our minds Aldi UK has quite effectively positioned itself as the British shoppers' champion, the agile and cheeky German, the underdog, taking on the big British trade to the consumers' benefit. And it should be said that Aldi UK, and its German discount compatriot Lidl UK, have been hugely disruptive and effective in market share terms in Great Britain over the last decade. Indeed, we would go as far as to say that the limited assortment supermarkets (LASs) have been the prime source of sector disruption. Whilst this is so, we noted with some interest a complaint made by Tesco^ UK to the Advertising Standards Authority (ASA), which took umbridge at a pre-Christmas 2018 basket comparison ran by Aldi UK. The German LAS basically stated that if one swapped to Aldi then one saved. Such matters tend to be part of the rough & tumble of retailing and more often than not, surprisingly it should be said to our minds, brand owners and competitors do not complain about whether or not the shopper is being misled, never mind if the competitive landscape is being distorted.
Tesco showcased some untapped money-making opportunities in the recently-concluded Capital Markets Day. The focus was on three pillars – Product, Channel and Customer. While some of these were not a surprise, the new opportunities were a welcome sign – boost its presence in Thailand through the convenience format, the concept of Tesco Finest (if implemented) and numerous cost savings steps. No change in the stock recommendation.
Tesco staged a calm, considered and self-confident Capital Markets Day (CMD) at its relatively recently opened 'Heart' innovation centre on the 18th June. The event centred upon the ‘untapped value opportunities' across the Group, though CEO Dave Lewis advised against adding up all of the opportunities discussed by his team during the day, not least because some will be beaten, some will not be achieved and there is ongoing work underway, considerably beyond what was disclosed. Our key takeaway, therefore, from the visit is that there is a quiet data driven revolution underway at Tesco; where a management team post-recovery is focusing upon pulling a myriad of levers to engineer 'significant opportunities for long-term sustainable competitive growth' through a focus on Customers, Costs and Cash. We reiterate our BUY recommendation.
Q1 lfl performance was softer than our expectations. Unfavourable weather and weak non-food sales (general merchandise and clothing) in the UK were the key pain-points. On a positive note, the domestic business once again clocked positive volume. The upcoming stock price triggers would be the Capital Markets Day on 18 June 2019 and Tesco’s ability to cope with Brexit (due in end October 2019). No change to the stock recommendation.
Tesco is reporting on Q1 trading on Thursday 13th June 2019 ahead of its Capital Markets Day (CMD) due to take place on the 18th June; note an ESG investor day is also set for 26th June. The Group is updating the market following a broadly encouraging FY2019 set of preliminary results, which were released towards the end of April. At that time management was able to record a sound year of progress in the UK, an improving profit performance from Central Europe (CE) and a reversal in the disappointing mood music from Asia, where the Group could have perhaps informed the market more appropriately of the evolving commercial operations in Thailand at the interim stage, which negatively impacted regional earnings. Since then, the UK grocery market has been tougher, as we expected from last year frankly, with the comparatives in May in particular pressurising the industry; we expect those comparatives with the clement April-July period in 2018 to be a feature of the whole industry through this period; Tesco UK's Q1 FY2019 comparative is 2.1% with Booker running at a Palmer & Harvey and Conviviality boosted 14.3%.
Tesco posted a strong performance in Q4 and FY18/19. Key takeaways were a reduction in the lfl decline in Asia, robust sales momentum in the UK, and a strong surge in profitability across all geographies. Retail FCF was a bit softer due to WCR outflow, but it is a non-structural issue. Next stock price trigger could be the Capital Markets Day, scheduled on 18 June 2019. We will increase our estimates, along with a possible upgrade in the stock recommendation.
We note with interest an update from the UK retail research house IGD that Tesco has further evolved its retail proposition in Hungary, a key market for the Group in Central Europe. The country's competition authority has approved the acquisition by MediaMarkt of Tesco's electronic goods business in nine of the British retailers 112 stores in the country. Whilst small beer in the big scheme of things, it is another notch in the extended workstreams to improve distinctly sub-optimal returns for Tesco from the region. Central Europe, notably Poland, could be one of a number of recent headwinds that reduce and maybe become tailwinds for the Group in FY2020, which we shall come back to. Tesco has a leading position in the Hungarian grocery market but the Group's network of large hypermarkets have progressively proven to be, as is the case in other markets in the British Isles and Central Europe, the wrong sized store for many shoppers. The concept of the one-stop shop has, therefore, been eclipsed by the return of the specialist, MediaMarkt being a case in point in the electronics segment, and growing penetration of online.
Tesco’s ability to regain lfl momentum after a softer Q3 in the UK is noteworthy. However, the company needs to improve the international operations (especially in Poland and Thailand) in order to be re-rated upwards. We have tweaked the earnings estimates but maintain the stock recommendation.
Tesco's share price has been weak in the back third of CY2018. There is no doubt that the market was deeply concerned and disappointed by the news of Charles Wilson's step down from the Group Board. Additionally, though two further factors seem to have come to play, a step down in UK grocery trading activity levels since the summer (lots of coupons & fuel discounting) and the surprising disappointment of the change in processes in Thailand that led to downgrades for the Asian out-turn. A supposedly more defensive stock has, therefore, been anything but, leading to a notably weak share price. From our perspective if we retain our FY2020 EPS expectations, predicated upon an 3.9% Group trading margin, then we are content to retain our BUY stance. However, it will probably be New Year before we can more aggressively back our financial assertions albeit we reiterate our BUY stance on the Group's stock.
It was a tough quarter for Tesco. The retailer is likely to remain under pressure in the near term, on the back of the Polish and Thai operations. The South-East Asian country is still lucrative for Tesco (with potential for a performance turnaround in the mid/long-term). However, we would not be surprised if management decides to exit Poland in the coming quarters. We have revised down our earnings estimates, also downgrading the stock recommendation (from Buy to Add).
Dave Lewis, Tesco's CEO, set out a target for trading margins from the Group (ex-Booker) to reach a range of 3.5-4.0% by February 2020, a target that has been the guiding light behind the narrative of Tesco's investment thesis since October 2016, when the business effectively emerged from the remedial measures he had to introduce upon joining the business. Indeed, that target, which no doubt will be dropped or at least not replaced after the April 2020 preliminary results, has been a source of debate with sceptics questioning its delivery and sustainability whilst bulls have suggested that the business, particularly with Booker in-tow, even though the wholesaler has a relatively low return on sales, can sail through the upper end of the range.
Tesco will issue H1 FY2019 results on the 3rd October 2018. We anticipate strong progress from the Group as it rebuilds profitability and continues the journey to FY2020 trading margins of 3.5-4.0% (ex-Booker). We expect H1 UK LFL sales of 2.0-2.5%, good sales progress in Ireland, an improving trend in Thailand but challenges in Poland, where Sunday trading has been curtained and stores closed. We forecast H1 CPTP of £868m, (consensus £811m), and EPS of 6.8p so yoy growth of 35%, delivery of which we believe would imply upward pressure on full year expectations (noting the just £16.4m settlement with respect to cyberattacks on Tesco Bank). We forecast FY2019 CPTP of £1,903m (consensus £1,872m), EPS of 14.p, yoy growth of c25%. Trading on 16.2x PER and an EV/EBITDA multiple of 7.5x and forecast to yield 2.1% (with the potential for special returns in the medium term) we reiterate our BUY stance.
Quite remarkable goings on have been reported across the English Channel between Carrefour and Casino, seemingly leaving the former somewhat annoyed that the Board of the latter somehow thought a bid has been tabled. Indeed, legal counsel is to be sought to stop innuendo! That can only lead us to assume that Carrefour and Casino have been in talks at some level and that for now they are no longer courting. However, that does not mean they will not dance again, subject to the dance master rules. More broadly, for the record, even with a commercial alliance taking shape, we would be surprised to see Carrefour and Tesco merge even with a seemingly excellent geographic fit across Europe. Meanwhile, ahead of its early October interim results, Tesco Bank may be facing a one-off fine due to the cyber-security attack of 2016 whilst its business in Ireland presses on.
As expected, Tesco has unveiled its discount store concept today. It will be called as ‘Jack’s’, named after the company’s founder Jack Cohen. The initial details are as follows: 1. This new store is touted to be cheapest in the town. 2. 10-15 new stores will be opened over the next six months. 3. 2,600 products will be sold (vs 20,000 in a typical Tesco store). Out of the total, 1,800 would be Jack’s-branded items. 4. As much as 80% of the products will be grown, reared or made in the UK. 5. Management plans to offer a cashier-less shopping experience (scan and pay using a mobile app) vs self-service machines or traditional check-outs. With this step, the UK’s largest retailer expects to take the fight back to discounters Aldi and Lidl, who jointly command a 13.1% market share today. Notably, the decade-long aggressive expansion by German discounters has long rattled the ‘Big 4’in the UK, which have lost considerable ground during the period. Although we agree that Dave Lewis needs to check the market share erosion (27.4% on 9 September 2018 vs 29.1% in January 2015) – the rampant onslaught from German discounters is the biggest pain-point – this strategy is a bold experiment by Tesco in our opinion. The UK’s largest retailer needs to ensure that this new format does not cannibalise the revenue of its existing stores. The margin of error is also higher as management needs to don multiple hats at the same time – traditional supermarkets vs discount format vs convenience stores vs e-com. The historical failures of other peers also highlights the high implementation risk with this format. Notably, Sainsbury partnered with Netto in 2014 but had to shut these discount stores after incurring losses for two years. In addition to reviving the performance of traditional stores, it is also interesting to see these large retailers treading on different paths as a competitive strategy. Despite an ambitious plan by the CEO, implementation remains the key to success.
Tesco reported Q1 FY18/19 results slightly below our estimates – UK & ROI performance came in line, but the international business was a bit weak. Initial progress on the Booker integration is quite satisfactory, aided further by the strategic decision to form a buying alliance with Carrefour and closing an unprofitable non-food website. We have incorporated the Q1 numbers and the impact of some new business events in our estimates. No change to the stock recommendation.
There was much weekend chatter in the UK business press about the forthcoming arrival of Jack’s, a new name to the high street from Tesco. It seems that Jack, should he emerge, will be a LAD (limited assortment discounter) seemingly seeking to compete more head on with the German discounters, albeit Lidl did sponsor England in the World Cup in Russia (if they had sponsored Germany just imagine what would have happened…). We shall await to see if Jack sees the light of day but it does appear that Tesco is indeed moving towards opening a new sub-brand. In this short note we ask some questions around the rational, consistency and potential materiality of such a move. To us there is unlikely to be material downside from Jack’s birth albeit whether he moves the dial for the Group or the wider industry margins remains to be seen. With Jack’s potential arrival ahead, Shore Capital retains its BUY stance on Tesco’s equity.
Tesco has continued its positive lfl momentum in Q4. Considering management’s success in the implementation of the turnaround plan, we take a more positive view on the company’s profitability going forward. Booker’s financials have also been integrated into our model. Moreover, the company looks much healthier today considering better than expected working capital management and its ability to reduce pension and debt obligations. Our stock recommendation is reset upwards to ‘Reduce’.
Sainsbury’s and Wm Morrison plunged c.5% yesterday after Kantar Worldpanel data showed a 20bp market share reduction (on a yoy basis) for both retailers during the 12 weeks ending 3 December 2017. The UK’s second and fourth largest grocers now command 16.3% and 10.6% market share, respectively. Market leader Tesco (-10bp yoy; 28.2% share) was least impacted amongst the UK’s big four as German discounters Aldi and Lidl jointly gained 120bp during the period (together command a 12.0% share). While Tesco clocked 2.5% top-line growth during the period, Sainsbury’s, Morrisons and Asda grew by 2.0%, 1.4% and 1.2%, respectively. The overall supermarket sales growth (+3.1% yoy) trailed grocery inflation (+3.6% yoy), which reached its highest level since 2013 as currency headwinds pushed up import costs.
Tesco reported a sixth consecutive quarter of organic growth in Q1 FY17 (trading update). Lfl sales increased by 1% (vs consensus: +1.6%), largely due to strong demand emanating in the UK (+2.3% lfl; 1.6% volume growth in fresh food with a significant market outperformance). However, International sales slumped 3% organically, largely due to the discontinuation of unprofitable bulk-selling activity in Thailand (-0.6% impact on group lfl, -2.7% on International operations and -5.8% on Asia). Reported sales were up 3.6% (vs Q1 FY16: +1.8%); the -0.2% scope impact was more than offset by FX tailwinds (+2.8% yoy). The company continues to implement the £1.5bn cost saving plan. The closure of two depots (Welham Green and Chesterfield) was completed in March and April 2017, respectively. The UK opticians business was sold in April (with efforts focused on the core business) and a new partnership was announced with Dixons Carphone – trial of Curry’s PC World outlets in two of Tesco’s larger stores to repurpose space. Management confirmed no further capital gains tax is payable in Korea and, hence, the currently held provision of £329m will be released. It also remains confident it will outperform the market and keep prices at bay in the remainder of the year.
Tesco released its FY2016/17 results which showed 2.7% organic sales growth yoy to £55,917m and underlying operating profit of £1,280m, i.e. a 2.3% margin. During this year, Tesco succeeded in enhancing its UK lfl growth, although rather stunted in the Q4. This has sustained its domestic business profitability, improving by 50bp to 1.8% the underlying operating margin. The latter contributed 63% vs. 53% to the group’s underlying operating profit. However, Tesco has taken a total exceptional charge of £235m in respect of the Deferred Prosecution Agreement (DPA) of £129m, the expected costs of the compensation scheme of £85m, and related costs. Thus, the net result came in at £-40m. Net debt decreased to £4.5bn following the lower gross debt and slightly better cash flow generation. However, the balance sheet remains stretched due to the ballooning pension deficit, which more than doubled to £6,621m. It is worth mentioning that the UK defined benefit deficit represents 98% of the group’s deficit. This came after the plunge in bond yields to record lows amidst the deterioration in the UK growth outlook.
Tesco and Booker, the leading UK food wholesaler, announced that they have reached an agreement on the terms of a recommended share and cash merger. Under these terms, Booker’s shareholders will receive 0.861 New Tesco shares and 42.6p in cash. Based on Tesco share price on 26 January, Booker is valued at £3.7bn. The merger will result in Booker’s shareholders owning 16% of the combined group. The aggregate value of the cash offer is approximately £760m which will be funded from Tesco’s existing cash resources. According to management, the tie-up will create possibilities of £25m extra revenue per annum and £200m in cost synergies by the end of the third year following the completion of the merger (late 2017/ early 2018). Cost synergies will be generated mainly from improved purchasing cost efficiencies and better opportunities in logistics and deliveries. However, this will require a one-off cash cost of £145m in the first three years after the effective date.
Lfl growth in the Christmas sales came in at 1.1% across the group and 0.7% in the domestic market vs. 2.9% for Morrisons. Over Q3, sales progressed by 1.5% on a lfl basis and by 6.5% on an actual rate, backed by the international operations (double-digit growth). The latter benefited from the collapse in the pound. Tesco reiterate its EBIT guidance of £1.2bn (slightly higher than our estimated figures).
THe Q2 figures witnessed a third consecutive lfl positive growth leading to a H1 16 sales improvement of 1.0% on a lfl basis. H1 sales stood at £24.4bn (£27,338m including fuel) following a promising Q2 (0.9% in the UK and 2.1% for international markets). Tesco’s sales have benefited from the increase in both volume and transactions in all markets. All formats – including the largest and the Extra formats – saw an improving trend in lfl sales performance throughout the half. H1 operating profit came in at £596m, i.e. a 2.2% operating margin and management expects £1.2bn for the whole year. This positive trend in the margin will continue according to management and reach 3.5-4.0% by 2019/20. Net debt decreased to £4,352m but total indebtedness surged by £3,400m with a ballooning pension deficit due to low UK bond yields, in the aftermath of Brexit.
After three years of decline, Tesco has shown a second consecutive quarter of sales growth in the UK. In its domestic market, sales increased by 0.3% lfl despite the steady challenging environment with continued deflation and stiff competition from the discounters Aldi and Lidl. There was a deflationary impact of c.-0.7% on total UK lfl sales. International lfl sales climbed (+3.0%) due to the positive result from both Asia and Europe, leading to a 0.9% rise on a lfl basis over this Q1 16/17. This positive trend includes a small contribution from new store openings, with total sales growing by 1.1% at constant rates. At actual exchange rates, sales grew by 1.8% including a 0.7% positive foreign exchange translation effect due to the weakening of sterling, principally against European currencies.
Tesco released its FY sales (excluding VAT, including fuel) which showed a decrease of 4.3% to £56,925m. International operations boosted both sales and the operating margin (slight progress to 1.73%). The 52-week sales for the retail division were driven by solid growth in international operations (2.3% lfl), countered by the continuing negative trend in UK sales, albeit an improvement. The FY 2015/16 net result came back into positive territory, having missed last year. Tesco managed to improve its debt profile through strong cash generation (less capex) and the sale of the Korean business (£4.1bn).
Tesco announced a lfl sales improvement of 0.4% for the 19 weeks to 9 January 2016 after a modest Q3 (-0.5% lfl). Volumes and transactions increased by 3.5% and 3.4% respectively, increasing the UK market’s 19W sales by 1.3% lfl. The Christmas performance was also strong in the international business (+4.1% lfl). Having finally restructuring its Central European operations, Tesco is further able to invest for customers and in supporting better availability and improved service. In Asia, the strong growth in customer transactions led to the highest market share in Thailand.
