The Tesco (LSE:TSCO) share price fell 5% in early trading on Thursday (8 January). This was the market’s reaction to the company’s trading update, which highlighted a slowdown in underlying sales growth over the crucial Christmas period.
Group like-for-like sales rose 2.4% over the six weeks to 3 January, easing from 3.1% in the third quarter and well below the 4.6% growth recorded in the second quarter.
UK underlying sales growth also moderated to 3.2% over Christmas, even though Tesco increased its market share to 29.4%, the highest level in more than a decade. Q3 like-for-like sales growth was 3.9%, versus the 4.8% expected by analysts.
Analysts had hoped that Tesco would upgrade its guidance for the full year, and that didn’t happen. Instead, the company said that full-year earnings would likely be to the top end of expectations.
Being squeezed
There’s another narrative here too. Despite the upbeat tone from management, the update also underlines how Tesco is being squeezed in the middle. On one side, budget-conscious shoppers continue to trade down, drawn by the relentlessly low prices of Aldi and Lidl.
On the other, higher-income customers remain selective, limiting how far premium ranges like Finest can offset broader value pressure.
Tesco’s response has been to fight on both fronts, expanding Aldi Price Match, rolling out over 3,000 Everyday Low Price lines, and simultaneously investing in premium own-label and fresh food.
That strategy has clearly protected market share, but it comes at a cost. Sustaining price competitiveness while maintaining margins is becoming harder as rivalry intensifies.
The slowdown in like-for-like sales growth over Christmas suggests that even market leaders are not immune to a more cautious consumer backdrop.
The valuation picture
I’ve been suggesting for a few months that Tesco is trading very close to fair value. It’s currently at 15.9 times forward earnings, which put its at a notable premium to its peers.
Earnings growth is actually expected to be negative in FY2026 (-4.2%) before improving by 11.1% in FY2027.
It’s also carrying quite a lot of debt. The net debt position now sits around £10.3bn, substantial for a company with a market-cap of £28.9bn and relatively thin profit margins (the margins thing is standard for the sector).
Now, I certainly believe Tesco deserves to trade at a premium to its peers. That’s because its size and market share gives its cost efficiencies that just can’t be matched across the sector. It’s also well-positioned to benefit when customers want to trade up — buy something a little tastier.
This should be on a growth and net debt adjusted basis however.
The valuation picture therefore is quite nuanced. It’s not cheap, growth isn’t overly impressive in the near term, and its carries lots of debt.
However, it’s the dominant player in the sector. And that might lead investors to think about longer-term dynamics. Or even consider how Tesco would benefit if financially-stretched Asda reduced operations.
Personally, I believe Tesco’s still worth considering but there may be better options out there.
