inflation begins to affect consumers

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Group retail sales in the first quarter, excluding fuel, rose 2.0% on a like-for-like basis (LFL), to £13.6 billion. Compared to pre-pandemic levels, this reflects LFL growth of 9.9%. Year over year, Central Europe saw the strongest LFL growth where the group continues to increase its market share.

Ken Murphy, CEO, said, “We are seeing some early signs of changing customer behavior due to the inflationary environment.” Despite this, the earnings and cash forecasts remain unchanged.

Shares were flat after the announcement.

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Our point of view

With growing pressure on consumers in the face of a cost of living crisis, Tesco managed to deliver a strong first quarter and keep its guidance intact. Comparing to last year is tricky given the increased demand we’ve seen during the shutdowns, so keeping retail sales within a few percent is a win.

Performance is aided by Tesco’s enormous scale. The mature and deep-rooted nature of its relationships has been a key tool in enabling Tesco to keep prices low. The strategy hinges on the ability to offer better overall prices than the competition, and Tesco has done remarkably well over the past two years. Promotions such as Aldi Price Match, Low Everyday Prices and Clubcard Prices have helped drive market share gains across the board.

Tesco’s online offering is also remarkable, with sales up 55% over the past two years. The gigantic growth is retracting, as customers return to stores. But a high level of online demand looks sticky, and Tesco’s market-leading position means it’s well placed to stick with it.

However, there are other things to keep in mind.

Inflation remains arguably the biggest headwind, although it is certainly not the one Tesco faces alone. From a customer perspective, the rising cost of living means wallets are going to feel tight. That should play into Tesco’s value-focused hands, but it means a bigger investment to keep prices down. An acceleration of the cost reduction programme, which is expected to generate £1bn of savings over the next 3 years, should help to mitigate rising costs to some extent.

Ultimately, these challenges cannot be avoided, but the nice thing is to continue to focus on creating value for buyers, which will position the group well over the next few years.

The Tesco dividend is of significant interest. A strengthened balance sheet is currently helping to support a forward-looking return of 4.4%, well covered by free cash flow. Remember that no dividend is ever guaranteed and that returns are variable and are not a reliable indicator of future income.

The good past year has given management confidence to accelerate share buybacks, which is a deviation from Tesco’s traditional dividend plans. This gives management the opportunity to capitalize on a valuation that has taken a hit given the broader conditions.

Ultimately, we think Tesco is well placed with a clear and focused proposition. Annual free cash flow expected to be between £1.4 billion and £1.8 billion, a reliable revenue stream and a leading market position are all serious advantages. Remember though that some ups and downs are to be expected given the wider and uncertain landscape.

Tesco Highlights


  • Forward price/earnings ratio: 11.7
  • Average 10-year price-to-earnings ratio: 11.9
  • Forecast dividend yield (next 12 months): 4.4%



All ratios are from Refinitiv. Remember that returns are variable and are not a reliable indicator of future income. Keep in mind that key numbers shouldn’t be considered alone – it’s important to understand the big picture.

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First quarter sales report (like-for-like sales growth)

Retail sales in the United Kingdom and Republic of Ireland rose 1.5% to £12.6bn, 9.7% above pre-pandemic levels. Year-on-year, the UK and Republic of Ireland saw sales fall into single digits as they outpaced inflated lockdown demand from last year. Both regions continued to grow market share, with distribution of value product lines such as Aldi Price Match growing by 19% in the UK.

Booker stood out, benefiting from an easier comparable period, restaurant sales increased by 57.4%.

central Europe saw retail sales rise 9.0% to £976m, up 11.3% from pre-pandemic levels. The division continues to increase its market share, with higher prices contributing to sales growth. Over the period, the group finalized the sale of 17 malls and 1 retail park generating around £200m.

Tesco Bank achieved a turnover of £261m, up 38.8%. This was largely due to the acquisition of Tesco Underwriting, as well as a recovery in card sales and travel money.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including forward-looking returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Investments go up and down in value, so investors could suffer a loss.

This article is not advice or a recommendation to buy, sell or hold an investment. No opinion is given of the present or future value or price of any investment, and investors should form their own opinion of any proposed investment. This article has not been prepared in accordance with legal requirements intended to promote the independence of investment research and is considered marketing communication. Non-independent research is not subject to FCA rules prohibiting trading prior to research, but HL has controls in place (including trading restrictions, physical and informational barriers) to manage disputes. potential interests presented by such a negotiation. Please see our full non-independent research for more information.

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