Does a 1.3% rise in food sales over Christmas now make Tesco plc a screaming buy?

Shares in Tesco (LSE: TSCO) dipped 2.4% in early trading this morning despite the UK’s largest retailer releasing a positive trading update for Q3 and the key Christmas period. Let’s delve into the figures and ask whether, in spite of today’s dip, investors should now consider adding the £17bn cap to their portfolios. 

Festive cheer

In the 13 weeks to November 26, group like-for-like sales at Tesco rose by 1.5% with UK growth at 1.8%. The latter led the company to report its first quarterly market share gain since 2011 and the eighth consecutive quarter of like-for-like volume growth.

Trading over Christmas was equally positive. In the six weeks to 7 January, group-like-for-like sales rose 0.3%, with growth in the UK reaching 0.7%. All-important food sales were up by 1.3%, continuing the trend set by peers Morrisons and Sainsburys earlier this week. The company also reported healthy growth in clothing and toy sales (4.3% and 8.5% respectively).

‘Once Drastic now Dependable’ Dave Lewis — CEO of Tesco — was suitably upbeat, reflecting on the “sustained strong progress” being made across the company. According to Lewis, the Welwyn-based business was “well-placed” to deliver on its plans to be “more competitive for customers, simpler for colleagues” and a “better partner” for its suppliers. Although international sales weren’t quite as satisfying (up 0.6%), he stressed that Tesco had continued to improve its offering to customers despite “challenging market conditions“.  

In closing the update, the company stated that it was on track to deliver at least £1.2bn group operating profit for the full year — the results of which will be released to the market in April.

Now a buy?

After a bleak few years, 2016 proved to be an excellent 12 months for holders of Tesco as several promising updates indicated the business had begun to recapture some of its past form. While nowhere near the dizzy price heights achieved almost 10 years ago (475p), the shares are up 22% since last January to 204p.

That said, market reaction to today’s results suggests that some investors are still to be convinced. This is understandable. While the company appears to be doing all it can to simplify its business and focus on key markets, the intense competition in the grocery sector isn’t going away. Although tight-lipped on like-for-like sales growth, the otherwise decent numbers released by Aldi and Lidl over the last couple of days show the extent of the challenge facing the three listed supermarkets.

Looming inflation won’t help. While today’s update highlighted that the company would be doing all it could to offer the best possible prices to shoppers, there remains the very real possibility that things will get tougher for Tesco and its FTSE 100 peers over the next 12 months. Suppliers can only be squeezed so far and the company needs to be careful that it doesn’t burn the very bridges it sought to build since allegations of unreasonable behaviour towards the former came to light. 

There’s another reason to avoid Tesco’s shares for now. After its infamous accounting scandal, the business is still to resume paying dividends. With so many other companies in arguably less-competitive markets offering decent, well-covered yields, Tesco’s lack of regular payout is a real issue for me.

In sum, today’s update was another undeniably positive step for Tesco. But a screaming buy?  I think not.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.