With over a 25% market share in the supermarket sector, Tesco (LSE: TSCO) is the UK’s biggest supermarket. Today, the grocery giant released its FY22 earnings results. Although the FTSE 100 company reported strong figures in every aspect, the Tesco share price has plunged 5% at the time of writing (Although it’s still up over 11% year on year). Here’s why.
A Lidl worried about Aldi’s prices
In its earnings statement, Tesco cited a cautious outlook as March’s CPI figure came in higher. With increasing food costs, many consumers have been flocking to budget competitors, Lidl and Aldi. This is evident in Kantar’s latest supermarket report as the two German retailers have seen an increase in their market shares. Nonetheless, Tesco reiterated its commitment to maintain its current prices. Unfortunately, this will also mean that its profit margins will most probably take a hit in the short-to-medium term. The firm also cited “significant uncertainties in the external environment”, giving a £2.5bn forecast for its operating profits in FY23. This is lower than the average £2.8bn analysts were expecting, and is the main reason why the Tesco share price is down 5% at the time of writing.
Squeezing every drop of juice
A consequence of inflation is that it sometimes leads to a wage-price spiral. This is when prices increase as a result of higher wages, and vice versa. As a result of this, Tesco decided to increase the wages of its workers by up to 6%. This could affect Tesco’s already narrow margins even further. This is worrying investors and several analysts who’ve dropped Tesco’s rating from buy to hold.
Nevertheless, CEO Ken Murphy mentioned on the company’s earnings call that Tesco will be using its new-found cash to invest in its supply chains. This should ease the margin pressure, and provides a silver lining in all the uncertainty as Tesco aims to work in close partnership with its suppliers to keep costs under control.
SUPERmarket
There were a couple of excellent points from Tesco’s FY22 results, however. For one, it reported stellar numbers across the board. There were healthy increases in revenue, earnings per share, free cash flow, operating profit, and a decrease in net debt. In addition to that, a £750m stock buyback was announced. This means that shareholders will be getting a bigger slice of ownership in the company, driving earnings per share higher. Normally, this would send the Tesco share price soaring. However, because the stock market often trades on speculation, Tesco’s amazing performance has been overshadowed by supply chain disruptions and inflation.
Yet I’m bullish about its long-term prospects and its ability to overcome the impending storm. I believe that Tesco’s quality and massive market share in the sector is a unique selling point. As such, it should be well positioned to maintain its position in the industry for the foreseeable future. The company’s customer loyalty plan and scale still makes it by far the best supermarket stock to buy, in my opinion. Tesco’s plan to price-match Aldi on 650 items also shows its negotiating power with suppliers. As such, with a low price-to-earnings ratio and reasonable dividend, Tesco is a lucrative buy for me if I was looking to earn some passive income from a decent dividend-paying company.
