With the Tesco (LSE:TSCO) share price down by 21% this month at the time of writing, is now the time to bag myself a bargain, and invest in Britain’s biggest grocer? It has just released its half-year results, presenting me with an opportunity to assess the company’s prospects.
Financial performance
Although Tesco’s sales (including fuel) increased by 6.7% to £32.5bn during the six months to 27 August 2022, adjusted operating profit fell by 9.8% to £1.3bn. Despite this, the full-year profit guidance remains unchanged, albeit more towards the lower end of expectations.
Chief executive Ken Murphy blamed inflation for the decline in profitability and noted that customers are “watching every penny to make ends meet”.
Tesco announced a 20% hike in its interim dividend to 3.85p per share. If the final dividend is increased by the same amount, this would give a yield of 6.5% — well above the FTSE 100 average of around 4%.
The supermarket is also part way through a £750m share buyback programme.
Competition
But, Tesco is facing fierce competition.
Everyone can see the impact that discounters, like Lidl and Aldi, are having on the £200bn UK grocery market. These two German supermarkets now have 1,900 stores between them, and a combined market share of 16%, compared to Tesco’s 27%.
Last month, Aldi replaced Morrisons as the UK’s fourth biggest supermarket. Tesco is seemingly so worried that it has introduced the “Aldi Price Match”.
Lidl’s former UK boss, Ronny Gottschlich, has predicted that both Aldi and Lidl will overtake Tesco’s market share by 2027.
And it’s not just traditional supermarkets that are threatening Tesco. Retailers like B&M, Home Bargains and Poundland are selling more discounted groceries than ever before.
However, in the face of this competition, Tesco has fared slightly better than its rivals.
Over the past five years, Tesco’s market share has fallen by 1.2 percentage points compared to 1.9%, 1.8% and 1.5%, for Sainsburys, Morrisons and Asda, respectively.
But there is clearly a shift away from the more traditional supermarkets towards the discounters.
Growth
So, how is Tesco going to arrest this decline?
Growth through overseas expansion does not appear to be on the agenda. In 2021, Tesco’s board took the strategic decision to close its international wholesale arm in Europe, the Middle East and Australia. It also sold its stores in Thailand and Malaysia for £8bn.
Perhaps in a few years’ time, Tesco will merge with one of its smaller UK rivals? However, the UK’s Competition and Markets Authority may object to this.
Tesco Bank was started in 1997, as a means of generating an additional income stream. Today, the bank contributes 5% of operating profit and seems unlikely to grow significantly.
Strategic drivers
Instead, Tesco has established six “strategic drivers”, hoping to create long-term value for its shareholders.
These drivers include financial targets like reducing costs, improving cash generation and achieving a 4% operating margin. In addition, there are less well-defined objectives, like wanting to serve shoppers better every day, maximising value from the company’s property portfolio and innovating.
Although uncontroversial, none of these appear to be particularly ambitious, and do little to reassure me that Tesco can arrest a seemingly long-term decline.
What am I going to do?
I am therefore not going to invest in Tesco. Instead, I’m going to shop around for better bargains.
