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The Tesco share price has fallen this week. Here’s why I’d buy

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A shopping basket filled with Tesco own-brand goods
Image: Tesco

The Tesco (LSE: TSCO) share price hasn’t moved much over the past few months, though it had been picking up since the beginning of June. But the past week has been a down week, as a result of Friday’s Q1 results. The Tesco share price ended the week a few percent down, but what was so bad?

Well, the figures for the first quarter look pretty positive to me. The company bills it as a strong performance, and I can’t disagree.

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Figures were mixed across geographic segments, but with like-for-like retail sales up 1% overall. That might not be too exciting, but it’s in comparison to a very unusual year last year. Looking back over two years, we see like-for-like growth of 8.1%. And I think that’s quite remarkable.

Some of the Tesco share price weakness will presumably be down to the lifting of Covid restrictions. Tesco benefited nicely from boosted online sales throughout 2020, and shoppers are increasingly able to go and select their own stuff now.

I don’t really get it myself. Why would I want to deal with the crowds, push trolleys around, and hump heavy bags of shopping home when I can have it all brought to my doorstep?

On that score, I think the next 12 months should be telling. Right now, we just don’t how many shoppers will stick with the newly-discovered ease of online shopping.

Many tried it in 2020 for the first time, but will they go back to the old way now they can? I’d be making a mistake judging it on my own preferences.

Retail sales weakness

We had the news this week that retail sales fell back in May. Unsurprisingly, online sales took a bigger hit, falling as a proportion of total sales for the third month in a row.

And that will have shaken the Tesco share price. Still, according to the Office for National Statistics, online sales are still up almost 60% from pre-pandemic levels.

Inflation has picked up a little bit too. After such a long period of stagnation, that’s not really surprising. But it can squeeze margins, at least in the short term. And while we don’t know how high inflation will reach, or for how long it might continue, it adds another extra bit of uncertainty to the picture.

Tesco share price valuation

For now, at least, Tesco is keeping its guidance unchanged. And even if we should see any market weakness in the coming months, I do think the Tesco share price still represents an attractive buy.

There are two key reasons behind that thought. One is dividends. Forecasts suggest a dividend increase this year after two flat years. It would lift the yield as high as 4.7%. And I think that’s very attractive for the supermarket sector.

My second reason is simply that it’s an essential sector we just can’t do without. And I reckon the best way into a sector is usually to buy the best company in it. For me, that’s easily Tesco. And I’d buy, even in the face of a possibly volatile year ahead.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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