Tesco’s shares race ahead while peers are distracted
Full year results from grocery giant Tesco (TSCO) on 10 April will reveal if the supermarket titan has extended an impressive run of quarterly sales growth.
With rivals Sainsbury’s (SBRY) and Marks & Spencer (MKS) both distracted by strategic activity, Tesco has been quietly focusing on improving the core business, an approach that has helped the shares rise 24% to 235.6p so far this year.
In a trading update on 10 January, Dave Lewis-led Tesco reported a twelfth consecutive quarter of growth for the core Tesco UK business, a strong Christmas showing benefiting from an increasingly competitive offer for shoppers.
Tesco also flagged ongoing improvements in the quality of its business in Central Europe, not to mention a stronger underlying performance in Asia.
Investors will be looking for news of fourth quarter progress in the core chain, as well as confirmation Tesco is working towards Lewis’ 3.5%-to-4% medium term operating margin target.
Bulls also expect Tesco to benefit from synergies and free cash flow following the 2017 takeover of Booker.
Shore Capital believes there is scope for pleasant surprises from the group for investors, particularly around free cash flow, that could increase dividend cover and set out a course for special dividends and/or a share buyback.
According to the latest Kantar Worldpanel grocery market share figures (5 Mar) for the 12 weeks ending 24 February, year-on-year sales growth in the ultra-competitive supermarkets industry held steady at 1.9%.
While Tesco’s market share fell by 0.2 percentage points to 27.7% amid further market share incursions by Aldi and Lidl, it achieved 1.3% sales growth in the period as customers bought 2% more items on each visit.
In contrast, Sainsbury’s sales fell 1% and its market share waned 0.5 percentage points to 15.7%.
Last month a report from the Competition and Markets Authority cast doubt over whether Sainsbury’s would be allowed to merge with Asda. However, Sainsbury’s continues to fight back and argues there are benefits to consumers from combining the companies.
Without a boost from Asda, Sainsbury’s is looking weak as a standalone business which has positive implications for Tesco.
Investors should note that Tesco will soon start to use a new accounting rule called IFRS 16. Although earnings downgrades are expected to filter through following the change, Tesco says the new accounting rule has no economic impact on its business, nor does it change the way the business is run.
However, it does have a significant impact on the way assets and liabilities are classified and the classification of cash flows. Further details on how IFRS 16 impacts companies can be found in this feature.