The Tesco (LSE: TSCO) share price didn’t do much on Thursday morning (9 January), after the supermarket giant posted a strong trading update for the festive season.
That’s despite CEO Ken Murphy telling us that “we delivered our biggest ever Christmas, with continued market share growth and switching gains.”
He went on to describe Tesco as “the UK’s cheapest full-line grocer for over two years.”
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Market share
The third quarter to 23 November, saw a 2.8% rise in total like-for-like sales. And then a bumper 3.8% Christmas lift pushed sales up 3.1% overall for the combined 19-week period.
Perhaps more importantly for the long term, the company said it hit its highest market share since 2016.
Kantar Worldpanel gives Tesco 28.5% of British market share as of 29 December. It’s edged up 1.2 percentage points in the past five years. Aldi and Lidl also gained over the same period, with Asda and Morrisons losing out.
The threat from the cheapies isn’t over. But they haven’t made the inroads that Tesco shareholders might have feared. And we’ve had a tough inflationary time for shoppers too, when the ‘pile it high, sell it cheap’ retailers should have enjoyed an advantage.
Cracking two years
Is the subdued market reaction on the day a surprise or a disappointment? No, I don’t think so, not looking at the recent past. The Tesco share price is already up 19% in the past 12 months, and 47% over two years.
It looks like the 2024-25 year is going in line with forecasts. So this healthy trading was largely expected. Much of the optimism will have already been built in to the share price. And it’s likely that some investors will have been taking some profit off the table.
For the full year, Tesco expects to see around £2.9bn in retail adjusted operating profit. And retail free cash flow should be within the range of £1.4bn to £1.8bn.
Finest
Tesco’s success in the past couple of years has to be down to its two-pronged attack on its rivals.
At one end of the scale, the latest update spoke of a “traditional Christmas dinner available at a 12% lower price year on year.” And that’s got to be the way to lure customers away from Aldi and Lidl.
And the company also reported a 15.5% rise in sales of Finest brand products, taking the challenge to its traditionally more upmarket rivals like Waitrose and J Sainsbury.
What it means
Forecasts put Tesco shares on a full-year price-to-earnings ratio of close to 14. For my money, I think that would probably price the stock about right, with a modest forecast dividend yield of 3.4%.
I might buy Tesco some day. But this year, I’ll be aiming for bigger FTSE 100 dividends.
Still, looking at the Tesco share price history of the past two years, buying sector leaders when their prices are down has to be a strategy worth considering for long-term investors, doesn’t it?
