What a start to the year by Tesco (LSE: TSCO). Even as the broader FTSE 100 has flagged in recent sessions, strong investor appetite for Britain’s biggest supermarket has helped lift the grocer to levels not seen since early October.
As it’s up 18% since the start of January, is now time to leap on the Tesco train? I fear not. In fact, I’d use this recent share price spike as an opportunity to sell up.
Market appetite for the Footsie firm increased further after the announcement of third quarter results in mid-January. It showed aggregated like-for-like sales for Tesco’s core UK and Republic of Ireland divisions had jumped 2.6% over the six weeks to January 6. As Tesco was proud to comment, the Christmas period saw the business “outperforming [the UK] market in both volume and value terms.”
It’s critical to consider, though, that once again its performance was put in the shade by both of the German discounters. Soaring demand for both its premium lines and cut-price products helped Aldi record its best ever trading week up to December 17 when sales growth hit 10%. And total sales at Lidl jumped 8% in the six weeks to December 30, as revenues from its Deluxe labels boomed 33% year-on-year.
Sales are slowing!
So I’m not that impressed by Tesco’s solid-enough performance over the festive period. Nor am I particularly enamoured by the news that the retailer enjoyed a 12th consecutive quarter of underlying sales growth during the 13 weeks to November 24, with sales at its UK and Irish divisions rising a collective 1.9% in the period.
In fact, the latest set of quarterlies raise more questions over whether Tesco has what it takes to thrive in this increasingly competitive landscape. That third quarter rise pales into insignificance when compared with the 4.2% like-for-like revenues rise in the second quarter and the 3.5% advance printed in the three months before that.
Adding to its troubles at home, Tesco also saw its performance on foreign shores decline in the last quarter, with sales worsening in both Central Europe and Asia as the fiscal year has progressed. Underlying sales dropped 3% in the third quarter in the former territory, while ongoing troubles in Thailand caused revenues to sink 8% in the latter region.
There’s plenty of scope, then, for bubbly broker forecasts to be chopped down, in my opinion. The number crunchers are anticipating a 33% earnings rise in the year to February 2019, and another 20% increase in fiscal 2020. The unrelenting expansion of the discounters, the possible tie-up of Asda and Sainsbury’s, and the rising pressure on consumer’s spending power leave the profits picture at Tesco looking more than a little perilous. And, in my opinion, a forward P/E ratio of 16 times fails to reflect this. I for one would sell out of the business post haste.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.