Tesco (LSE:TSCO) shares have underperformed in recent years, but so have many UK-listed stocks. The supermarket giant is currently down 21% over 12 months, and is only up 7% over the past five years.
So, with the share price pushing downwards amid a cost-of-living crisis, is now the time to add this stock to my portfolio?
Challenging operating environment
Supermarket sales surged last month, driven by historic levels of food inflation. According to NielsenIQ, total till sales jumped 7.6% in the four weeks to 3 December, compared to growth of 5.3% in the previous month.
Tesco, the UK’s largest grocer by market share, saw sales rise by 6.5%. Peers like Morrisons and Waitrose saw sales fall 3.3% and 1.5% respectively.
So, revenues are increasing. But the challenge is that costs are increasing too. And amid that cost-of-living crisis, the big question is: how much of these costs can supermarkets pass on to their customers?
Sales have undoubtedly risen strongly in the lead up to Christmas. Experts at McKevitt recently said that the combination of record inflation and festive spending meant December was likely to be the biggest ever for take-home grocery sales.
However, analysis suggested that shoppers will have needed to spend an extra £60 in December to acquire the same items as last year.
Margins
Margins are likely being squeezed with inflation pushing product costs, staffing costs, and energy costs higher. It’s worth noting that food stores are some of the biggest energy users in the country. With energy prices going sky high, these giant supermarkets are costing a fortune to heat up and to cool down.
The feared onslaught from the cut-price Aldi and Lidl really hasn’t materialised. But this is probably coming at the expense of margins. Price matching with the low-cost European firms will cost the FTSE 100 firm in the near term, but in the long run, protecting its market share should be worth it.
Tesco’s profit guidance has been trimmed as a result. The most recent guidance remains within the low end of the previously announced range. In October, the firm said it expects full-year retail adjusted operating profit of between £2.4bn and £2.5bn as half-year profits fell 65% to £413m.
Is there an upside?
With grocery retail, there are plenty of variables that aren’t always easy to predict.
For example, Tesco isn’t known for being a cut-price supermarket, but despite the cost-of-living crisis, it has outperformed several of its peers with regards to sales in recent months.
Both Waitrose and Morrisons, arguably at opposite ends of the market, have seen sales fall.
So, would I buy Tesco shares? Not right now. I’m concerned about the operating environment over the next six months. I appreciate the firm has the resources to see an economic downturn through, but there are plenty of uncertainties in the coming months.
By all means, these uncertainties could be positive. Tesco might take more market share from its competitors. But the uncertainty doesn’t appeal to me, even with the near-5% dividend yield.
