Companies like Tesco, which today announced good first quarter figures, can provide a recession-proof cornerstone for our portfolios.
In a first-quarter trading update released today, Tesco (LSE: TSCO) has shown what a recession-proof company it is. While many others have had trouble weathering the economic turbulence, Tesco has seen UK sales rise 4.3% for the quarter. That's up on the previous quarter, which saw a 3.7% increase in sales. Chief Executive Terry Leahy described it as "a solid start to the financial year, maintaining good momentum in a challenging economic climate".
Investors seem to have taken the news well, with the shares up around 2% at the time of writing.
Worldwide, things look even better. Excluding petrol sales, total sales for the group rose by 12.6%. (Including petrol, group sales rose by 9.7%, but pump prices have fallen sharply during the past year).
Tesco banking
The company's financial arm, Tesco Personal Finance, contributed 2.2% to that growth, on top of 2.8% added by new stores. With six in-store banking and insurance facilities opened in stores to date, and up to 30 planned by the end of the year, it does seems like a good time to be offering a bit of competition to the traditional banks. With bank branches having mostly disappeared from our high streets, being able to sort out your money matters while doing the weekly shop has to be a great boon to customers. The progress of Tesco Personal Finance is definitely something we should be carefully watching over the coming years.
International growth
Though currency exchange rates haven't been good for those of us flitting off to the sun or buying imported goods, the low pound has certainly helped boost the value of Tesco's overseas sales when stated in sterling.
Asian growth (and there have been economic hard times in the East too) is up an impressive 44%, boosted by the conversion of the group's Homever stores in South Korea. Homever, a 36-store dicount chain, was bought in 2008 for £960m, and has clearly integrated well with Tesco's hypermarket and convenience store strategy in that country.
Sales in the US also rose, a very impressive 174%, although this part of this business was only launched fairly recently.
Tesco also reported that the relaunch of its Clubcard loyalty scheme has been received well by customers, who are able to double up the value of their vouchers when used for a range of products. Apparently more than a million of them have taken up the offer so far.
The reason for success
Why is Tesco looking strong in such hard times? In a large part it's because it sells mainly essential items, like food, clothing, basic utensils and consumables, which people need whatever the economic climate. But more than that, when people have less cash to spend, it's things like eating out, buying fancy lunches from posh sandwich shops, and splashing out on fancy-label clothes that they curt back on. If punters are becoming more value-conscious, eating at home more, and generally living a more basic lifestyle, that can only help the supermarket chains.
But having said that, some of Tesco's competitors have been doing even better. Asda, owned by ace cost-cutter Wal-Mart, in May reported quarterly like-for-like UK growth of 8% -- more than twice Tesco's growth. Being widely seen as aiming mainly for basic lower-priced goods and brands, it's no real surprise that those feeling the pinch more have flocked to Asda's doors.
Wm Morrison (LSE: MRW) also recently posted a first-quarter sales growth of 7.3%, and it will be interesting to see what J Sainsbury (LSE: SBRY) comes up with in its first-quarter statement tomorrow.
A good investment
We've seen a small jump in the share price in response to today's news, and I think we should probably be expecting fairly modest appreciation over the next few years. But even if the shares only grow 2-3% per year, on top of the 3.5% dividend yield (which is probably one of the most reliable around) that's a nice little earner for a long-term investor. And with more international growth expected, especially in SE Asia, I can see Tesco shares actually doing better than that.
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