The Tesco (LSE: TSCO) share price got a 3% boost Thursday morning (12 June), on the back of a Q1 update. Like-for-like sales in the 13 weeks to 24 May rose 4.7% in the UK and Republic of Ireland, with total sales up 4.6%.
Even with increased price competition, CEO Ken Murphy said: “In the UK we have continued to see market share gains.”
The latest Kantar survey put Tesco’s share of the UK groceries market up to 28%. So much for the feared dominance by the ‘pile ’em high, sell ’em cheap’ interlopers.
Shareholder rewards
Despite a spring dip, the Tesco share price has risen 30% in 12 months. The past five years cover a tougher inflationary period, but we still see an overall 37% gain. Oh, and five years of dividends with yields around 3.5%.
It’s no wonder Tesco’s a popular bedrock stock for so many Stocks and Shares ISA investors.
The CEO added: “The market remains intensely competitive.” Tesco remains focused on price matching to deal with it, currently offering an Aldi price match on more than 600 items. The latest update also spoke of around 1,000 Everyday Prices deals and 9,000 Clubcard specials each week.
As well as matching the competition directly, I rate that as a smart marketing move. If Tesco customers clearly see the effort to avoid being undercut by Aldi, it should make them less likely to actually shop around and find out for themselves.
Not just cheapies
The Clubcard scheme has been a big success. Who’s going to shop somewhere else and miss out on this week’s offers? On top of that, I reckon Tesco’s price-range marketing has been something of a masterstroke. In the quarter just ended, Finest brand sales rose an impressive 18% year-on-year.
Not only is Tesco going head to head with Aldi and Lidl, it’s also attacking what was traditionally the Sainsbury’s end of the market. Sainsbury’s though, is still in a decent second place with a 15% market share as it also targets a wider range of consumers.
Looking ahead
Part of the risk from competing across the full range of the market comes in the form of margin pressure. And that’s especially key at a time when inflation and interest rates are still high.
There’s no news of margins in this update. So that’s something we should watch for in first-half results due on 2 October. Still, at FY results time in April, we actually saw the company’s operating margin edge up slightly.
Tesco left its full-year guidance unchanged. The board expects adjusted operating profit ranging £2.7bn-£3bn, with free cash flow of £1.4bn-£1.8bn. The current £1.45bn share buyback programme has reached £448m so far, expected to complete by April 2026.
What to do?
A forward P/E ratio of 14.5 might not look screamingly cheap. And pressure on the retail sector could squeeze the share price in the medium term. But I rate it as fair value, and Tesco remains one of the core stocks I think long-term ISA investors should consider.
