I’m bullish on Tesco (LSE: TSCO) shares. I’ve commented on the stock before and I reckon now is still a buying opportunity. The food retailer released its first-quarter statement last week and I think it’s worth taking a closer look.
Trading update
On the whole I thought the trading update was encouraging. Total sales for the quarter amounted to £13.4bn, which was an increase of 1% on a year ago and a 8.1% improvement compared to two years ago before the pandemic.
Now, a 1% increase may not be much or be too exciting. But let’s remember that a year ago we were all at the height of a global pandemic when supermarket sales soared artificially high. So when comparing it to the same quarter in 2020, Tesco is using the extraordinary demand seen back then as a base.
The fact that the retailer managed to deliver some growth from an already high base, I think, is impressive. Online demand is still strong at 1.3m orders per week. It saw two-year growth here of 81.6% and one-year sales growth of 22.2%. Tesco’s investment in its online offering has clearly been paying off.
It continues to be price-conscious. The retailer has maintained its Aldi Price Match on over 500 lines. This has strengthened its price position against its key competitors.
Things to come
While Tesco has made a strong start to the year, sales are starting to slow down. It indicated that growth on a two-year basis “moderated” in April and May as lockdown restrictions eased. This shows that customers are dining out and enjoying their renewed found freedom, including shopping at other stores that were previously closed.
But is this a sign of things to come? I reckon sales could slow further over the coming months as more people continue to socialise. But the bottom line is that people need to eat and they most likely won’t be wining and dining every day of the week.
I think that once the lockdown-easing euphoria has subsided, things should start to go back to some kind of normality. This means that sales growth could start to rise gradually from pre-pandemic levels. This should be positive for Tesco shares.
Outlook
The food retailer left its profit guidance unchanged from April. As a reminder, it expects “retail operating profit to recover to a similar level as in the 2019/20 financial year (on a continuing operations basis) – the year prior to COVID-19 having any impact on performance”.
Given the level of uncertainty from the pandemic, Tesco didn’t commit to producing actual forecast figures. It gave itself a degree of flexibility in terms of its profit outlook.
On the bright side, the fact that the company still believes it can generate profits at the pre-pandemic level is a good thing. I guess I’ll have to wait for the next trading update to see if it’s still on track to deliver this.
Risks
Tesco shares aren’t without risk. While the food retailer has a strong brand, it’s facing fierce competition from the other supermarkets. Growth could continue to fall once lockdown restrictions fully ease, which could impact sales. Hence there’s no guarantee that it can meet its profit guidance for the current financial year.
But I’m optimistic on the prospects for Tesco shares. The stock generates an attractive dividend yield, which is covered by earnings. Hence, I’d buy now.
