Tesco increases profit guidance after record festive period sales

Tesco, the UK’s largest grocer by market share, enjoyed record sales during the festive period and increased its profit guidance for the year as a result.

In many respects, Tesco is the winner of this year’s round of FTSE 100 supermarket festive trading updates.

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Group retail sales combining Tesco’s Q3 and Christmas trading periods rose 6.4% as the grocer successfully fought off the discounters and grew market share by 15bps.

Tesco cut prices on 2,700 products and attracted shoppers with low prices through schemes such as price matching with discounters and Clubcard prices.

In addition to strength in value ranges, Tesco will be delighted with sales performance at the other end of the product range. Tesco Finest range sales rose 16.7% in the UK, achieving a record Christmas trading week as Tesco marked the 17 consecutive period of stealing higher-end spending away from other premium retailers.

Booker sales edged higher as both the catering and retail units produced mid-single digit sales growth.

Profit guidance increased

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Robust performance across all of Tesco’s food-focused businesses resulted in a slight increase in profit guidance for the year. Tesco now predicts retail adjusted operating profit of £2.75bn, above its previous guidance range of £2.6bn to £2.7bn.

The increase in guidance is small yet significant. In an environment where peers such as Sainsbury’s have maintained guidance, shareholders will see an increase in guidance as a major positive.

In early trade on Thursday, Tesco shares were little changed, gaining 0.7%.

Given the upbeat release, holders of Tesco shares may have expected more of a reaction. Still, they will be satisfied the stock has gained substantially ahead of the results, and the market reaction to the festive trading update was materially better than peers Sainsbury’s and Marks & Spencer.

“Tesco has managed what Sainsburys couldn’t quite muster, which is a profit upgrade for the full year. The tills were chiming away over Christmas, and the slightly conservative previous estimates, coupled with lower exposure to General Merchandise, means there’s room for expectations to be inflated. Investors will be especially pleased to hear of the £2bn in retail free cash flow due to pump round the business this year, helping to underpin the group’s ability to invest in staying competitive, and helping sustain the not insubstantial prospective dividend yield,” said Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown.

“Of course, there are no rainbows without rain. The wider pivot to value offerings, including in Europe where Tesco has a substantial footprint, could keep a lid on progress in the face of a consumer slowdown and volume weakness. The strong value proposition means Tesco is exposed to consumers who are feeling the pinch economically, so keeping them shopping with Tesco and at the right price points, is a big task. “

Lund-Yates concluded by touching on the dynamics in consumer spending amid the cost of living crisis that may support Tesco’s earnings through the rest of the year.

“The other side of the coin is that it’s increasingly clear that consumers are choosing to treat themselves at home. A restaurant might be too much of a stretch, but that translates into being willing to spend a few extra pounds on a special meal in, and Tesco can certainly taste that difference.”

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