12th Jan 2023 19:06
(Alliance News) - Tesco PLC affirmed its annual guidance on Thursday as the grocer hailed "strong growth" over the Christmas period and maintained its market share-leading position.
AJ Bell's Russ Mould said that for Tesco to "protect" and "even build" on this against the backdrop of a "cut-throat" supermarket sector in the UK was impressive.
However, the analyst warned that, with sales growth running behind inflation, it appeared Tesco has had to "indulge" in heavy discounting to keep its tills ringing and fight off the challenge of discount operators like Aldi and Lidl.
In the 19 weeks to January 7, Tesco's like-for-like sales rose by 6.4% year-on-year, excluding VAT and fuel. In the UK, like-for-like sales grew by 5.3% in the 19-week period.
The strong performance was driven by a focus on "value & quality", the supermarket said, noting particular strength in fresh food which was up 8.1% against the comparable period the year prior.
For all the progress, however, there remained an elephant in the room for Hargreaves Lansdown's Sophie Lund-Yates.
"A large proportion of success is coming down to discounting. Things like Aldi Price Match and price freezes are very successful tactics, but can spell bad news for margins."
"The tug of war between pricing and volumes is clearly producing a good result, which is why profit expectations have been reiterated, but it's still hardly an ideal state of affairs for the big names in industry. The major question now is how supermarket spending will hold up from here," she continued.
Tesco backed its annual guidance in the wake of the strong Christmas period. It expects retail adjusted operating profit between USD2.4 billion and GBP2.5 billion, as well as retail free cash flow of at least GBP1.8 billion.
In financial 2022, the grocer reported retail adjusted operating profit of GBP2.65 billion, while group adjusted operating profit amounted to GBP2.83 billion.
Neil Shah at Edison Group noted that, as household budgets show a greater focus on food and essentials, this should allow the grocery retail sector to stand in good stead to weather the cost-of-living crisis.
However, like Lund-Yates, Shah warned that keeping up with discounter retailers will be a challenge for the firm over the coming year. interactive investor's Richard Hunter agreed.
"If there was ever a guarantee in the supermarket sector," Hunter said, "it is that competition will remain fierce, especially in the most obvious differentiator of price."
"The ongoing pressure of general cost inflation allied to a consumer with a keen eye on value means that investments to mitigate cost increases will remain of vital importance," he explained.
It was this "worryingly uncertain" macroeconomic background in the UK that saw Shore Capital hold back from being "more positive on a neutral stock stance despite good trading across the board" for Tesco.
"Until inflation eases, so that household finances have the prospect of improvement and so consumer confidence increases, we are also nervous about aggregate demand and so the robustness of our financial estimates for financial 2024 in particular," the capital markets firm said.
"Accordingly, despite good third quarter festive execution, that macro-outlook is holding us back for now on being more positive on Tesco equity at this time."
Consequently, Shore Capital retained its financial 2023 forecast for the supermarket for both pretax profit and earnings per share. It expects Tesco to achieved pretax profit of GBP1.98 billion and EPS of 20.8 pence.
In financial 2022, Tesco reported a pretax profit of GBP2.03 billion and diluted EPS of 19.64p. If Shore Capital's forecasts were to be met by Tesco, this would therefore represent a decline of 2.5% year-on-year for annual pretax profit, but growth of 5.9% for EPS.
Tesco said it will report full-year results on April 13.
Shares in the firm closed down 0.8% at 241.81 pence on Thursday in London. In the year-to-date, the stock was 5.6% higher.
By Heather Rydings, Alliance News senior economics reporter
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