With December almost upon us, the annual festive sales splurge is already beginning. While many consumers may have less disposable income now than last year, I still expect there will be heavy spending at retailers like Tesco (LSE: TSCO). Could that provide a boost to Tesco shares?
The Tesco investment case
Understanding why the Christmas shopping season is important helps show the supermarket’s investment case in microcosm.
As the country’s leading retailer, Tesco makes mammoth sales in its stores. But it also has a large digital operation, so people shopping online can also help boost revenue. It has nine million regular users of its app, for example.
That overall size helps give the retailer economies of scale, allowing it to compete on price while also making a profit. It also stocks a wide range of products across its store estate and digital channels. That enables Christmas shoppers to load up not only on groceries but also an extensive range of gifts, giving customers less need to try out alternative shops. That can help build loyalty.
Long-term outlook
I expect Christmas will bring another sales boost to Tesco. Last year, what the company described as its “strong Christmas performance” saw the retailer achieve its highest market share in four years.
But is that going to boost the shares in December and January? While investors may pay more attention to retail shares during this period than normal, I think the long-term price of Tesco shares depends primarily on its year round performance. A strong set of Christmas trading results can certainly help that, but it is only one part of a bigger picture.
I reckon the business stacks up well in that regard too. Its size and scale form the foundation for long-term profits. Meanwhile, the past couple of years have seen double digit percentage growth in the dividend. Currently, Tesco shares yield 5%.
There are risks. The growth of digital shopping has not thrown Tesco off its stride. Indeed, it has embraced the opportunity, but profit margins are less attractive online than in traditional grocery stores. In-store, customers pick products themselves before taking them home. In the online model, those tasks and associated labour costs fall on the retailer. So the growth of online retail — even its own — could hurt profit margins.
I’d buy Tesco shares
As a long-term investor, what attracts me to Tesco is not the possibility of a seasonal sales blip but rather the underlying characteristics that make it a strong, robust business.
Its shares have fallen 17% in value over the past year and the company now has a market capitalisation of £17bn. That looks like good value to me for a company that made £1.5bn in profits after tax last year.
If I had spare cash to invest now, I would add Tesco to my portfolio.
