Tesco has long been one of the UK’s stalwart institutions, and has remained at the top of the food chain as one of the country’s “Big 4” grocers, alongside Asda, Sainsbury’s and Morrisons.
However, despite Tesco’s sparkling financial results for the last year, the supermarket warned shareholders of its widened profit guidance for the coming year as Russia’s invasion of Ukraine, the rising energy price cap and the spiking rate of inflation lead to a cost of living crunch which risks driving customers out of Tesco, and into the aisles of its discount competitors.
Tesco Financial Results
Tesco enjoyed shining financial results in its report for 2021-2022, with a profit of £176 million after a loss of £175 million in the previous year, along with a revenue of £922 million against a top line of £735 million the year before.
The supermarket also noted a 2.5% increase in Group sales to £54.7 billion against £53.4 billion in 2020-2021.
The grocery franchise saw a 2.2% rise in like-for-like sales throughout its UK and Republic of Ireland customer base due to strong sales, reduced Covid-19 costs and a swing back to profitability for Tesco bank.
The company’s adjusted diluted earnings-per-share also rose 88% to 21.8p against 11.5p.
However, Tesco warned that its profit guidance would be widened to an adjusted operating profit between £2.4 to £2.6 billion for the next financial year.
Spiking Inflation
Russia’s war in Ukraine has sent the UK economy into a tailspin, with goods and services including oil, food and housing all caught in the chaotic fallout. This has been reflected in the Tesco share price which is down 9% so far in 2022.
The price of oil surged to long lost heights of $120 per barrel in March, sending the price of petrol, heating and food through the roof.
The UK energy price cap also rose 54%, tacking on an average of £700 to the energy bills of British households and adding to the burden of climbing food prices which left consumers between the stomach-churning options of heating or eating in the middle of a cold spring snap.
Inflation hit a rate of 7% in March 2022, the highest level since records began in the 1990s, and the pain is only set to get worse with a peak of over 8% inflation in the dead of winter this year.
These factors have led Tesco to widen its profit guidance for the upcoming year, and it explains why the Big 4 grocer’s share price took a hit on the day that its high-performing financial results were released earlier in April.
The Group has warned that a variety of factors including post-lockdown customer activity and cost inflation would contribute to its widened profit guidance, along with the supermarket’s significant investment to retain its market price position.
The surging cost of living might just create the ideal opportunity for its lower-priced competitors to step in and dull the burnished glow from Tesco’s shares.
Discounter Diversion
Grocery inflation reached a peak of 5.2% in March, according to data from Kantar, which saw customer levels at discount stores surge.
Longstanding discount giants including Lidl and Aldi reaped the benefits of tighter belts on customers, with Lidl earning a 6.4% market share and Aldi soaring to an 8.6% slice of the supermarket pie, less than a mere 1% from Big 4 player Morrisons.
“More and more we’re going to see consumers and retailers take action to manage the growing cost of grocery baskets,” said Kantar head of retail and consumer insight Fraser McKevitt.
Aldi and Lidl also noted increased sales in the 12 weeks to 20 March, the only larger chains to achieve growth over the period of decline.
Meanwhile, Tesco reported a 5.2% fall in sales over the same term, highlighting the trend of customers fleeing the major chains for discount stores already in action.
The fact that this trend can already be spotted before the full impact of rising inflation has hit consumer wallets bodes poorly for the grocery giants across the UK.
The recent downturn in household budgets has trimmed customer spending down to its bare bones, and is eating into the basic necessities of living.
Tesco Shares Valuation
The grocer’s current price-to-earnings ratio is 12.3, with a forward price-to-earnings ratio of 12.6, which indicates that the group is projected to produce tepid profit growth moving into 2022-2023.
The predicted growth hardly leaves room for bounding optimism over the company’s prospects, and with fairly good reason in light of the surging cost of living in recent times.
One would think the Tesco share price is set to struggle this year as the company fights to maintain, let alone grow, its customer base.