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Can the Tesco share price climb higher?

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The Tesco (LSE:TSCO) share price has been experiencing quite a bit of volatility lately. However, despite this, it remains basically flat over the last 12 months taking the firm’s share consolidation into account. Even after ignoring the adverse stock price effects of the £5bn special dividend paid in February this year, the Tesco share price has hardly been a stellar performer. But is that about to change?

A mediocre trading update

Last month, Tesco published its latest annual report covering the business’s performance between February 2020 and February 2021. On the face of it, these results weren’t particularly exciting. And I can see why the Tesco share price remained flat on the news. Overall revenues fell slightly from £58.1bn to £57.9bn, while underlying profits suffered considerably, declining by 21% to £1.7bn. However, upon closer inspection, there are a few reasons to be optimistic.

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Ignoring the revenue generated by petrol stations, the top line actually grew by around 7%. Given that the closure of pubs and restaurants resulted in an increase in grocery spending, I’m not too surprised. What’s more, the reduced performance from its fuel selling operations is also unsurprising given that a lot of cars remained parked throughout a large portion of 2020. A 7% growth in revenue is hardly ground-breaking. But for an established retail giant like Tesco, that’s not bad — and it even allowed the company to increase its market share for the first time in four years.

One-off costs

Seeing a large drop in profitability is never a pleasant sight. But in the case of Tesco, this came from increased operational expenses caused by the pandemic. While Covid-19 has decimated many businesses since early 2020, Tesco has remained relatively resilient.

To date, around 30.2m individuals have received their second vaccination dose. As a result, everyday life has been slowly moving back towards normality, with the last of the lockdown restrictions set to be lifted in England on July 19 after the June 21 date was axed. All of this is to say that the pandemic-related expenses experienced by Tesco are ultimately a one-time event that is unlikely to be repeated moving forward. In other words, Tesco’s profitability may be making a swift return, potentially sending the Tesco share price to higher levels.

The Tesco share price has its risks

The uncertainty surrounding the Tesco share price

While the end of lockdown restrictions may allow profits to return, it may also adversely impact Tesco’s revenue. After all, now that restaurants and pubs have reopened their doors, the level of grocery spending is likely to be negatively affected. 

Another potential issue is the return of in-store shopping. Online grocery shopping gained significant popularity last year, as shoppers sought to avoid coming into contact with other people. However, as in-store shopping footfall continues to recover, shoppers may return to discount stores like Lidl and Aldi instead of Tesco. And this, in turn, may result in the newly gained market share being lost.

Combined, this adds a considerable level of uncertainty to the Tesco share price. Yet, with its first-quarter earnings report shortly coming out, a clearer picture may soon begin to form. Even with these risks, I do believe the Tesco share price can climb higher over the long term. But, for now, I’m waiting to see how Tesco performs in its next earnings report. 

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Zaven Boyrazian does not own shares in Tesco. 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.

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