Shares in Tesco (LSE: TSCO) were flat in early trading despite the company revealing a sixth consecutive quarter of positive like-for-like sales growth to the market.
Group like-for-like sales grew 1% over the period (0.8% at constant exchange rates). In the UK, sales were up 2.3% compared to just 0.3% in Q1 last year. The Welwyn-based company claimed to have completed 10m more transactions than over the same period in 2016 and that a 1.6% rise in the volume of fresh food sold outperformed the rest of the market.
Online grocery sales continued to do well — rising 4.8% — with business at Tesco Bank increasing by the same percentage.
On an international front, like-for-like sales dipped 3% with much of this down to CEO Dave Lewis and co’s strategy to simplify the business and discontinue unprofitable bulk selling activity (on products such as alcohol and tobacco) in Thailand.
Elsewhere, Tesco continued to cut costs and restructure the business. It recently sold its opticians business to Vision Express, closed two depots and signed a new agreement with Dixons Carphone to bring outlets of Curry’s PC World to two of its larger stores in an effort to “repurpose space“. Positively, the company reported that the year-on-year impact of recent disposals (Dobbies, Giraffe and Harris & Hoole) “more than offset” the costs associated with store openings.
Running to stand still?
Overall, it seems that Tesco’s management continues to do a decent job of turning the FTSE 100 juggernaut around. The strategy of refocusing the company on its core supermarket business is slowly bearing fruit and, based on today’s numbers, it would surely be harsh to challenge Lewis’s assertion that Tesco has made a “good start” to the year, despite the “tough market conditions“.
The question, however, is how patient investors should be and whether this recovery is sufficiently strong to see the shares return to previous highs. Right now, breaching and remaining above 200p looks tough enough.
My concern with Tesco actually has little to do with the company itself and far more to do with the current economic uncertainty affecting the UK. While clearly in far better shape than it was a few years ago, the rise in inflation could be an obstacle to further progress. Its enormous market share remains one of its great attractions, of course, but a general and sustained increase in prices could see even more people choose or be forced to frequent the stores of rivals, particularly the hugely successful German discounters. With Brexit on the horizon and investors becoming increasingly concerned about a market correction, I’m not convinced that they will suddenly be a flood of buyers for the shares, regardless of whether the company keeps to its word and begins offering dividends again.
Bottom line
On a long enough timeline, the likelihood of Tesco’s shares passing through the 300p seems fairly high. For now, however, I think the positive momentum the company has managed to build is at risk of being lost thanks to economic pressures beyond its control.
So, while the sheer size of Tesco is sufficient to make it my first choice when it comes to selecting a supermarket to invest in, I also believe it’s vital to consider the opportunity cost of doing so when there appear to be far better opportunities to make money elsewhere on the market.
