Tesco's Plan For Success Stored in Prices

The UK's largest grocery retailer has faced a challenging quarter, but with inflation coming down, could there be light at the end of the tunnel?

Time to Reassure Markets?

Tesco is due to issue its fiscal Q1 trading update tomorrow, after a month in which it was affected by a series of issues. While none on their own likely would affect the fundamentals for the company, the concentration of negative press doesn't help the brand already dealing with the pressures of the cost-of-living crisis. Tesco customers are generally seen as more vulnerable to price increases, while the company faces competition from budget-centric rivals Lidl and Aldi, which keep capturing market share. Aldi was the fastest grocer last month.

According to Kantar, Tesco's sales rose 8.9% in the year to May, barely keeping up with inflation. Prices are still growing at the third highest rate since 2008. In that milieu, Tesco lost its chair, John Allan, over misconduct allegations. Its Clubcard was accused of hiding prices. And it lost a trademark dispute with Lidl over the Clubcard logo, with the rival looking to take a share of the profits. The trading update would be an excellent opportunity for the firm to reassure markets and put the issues in the rearview mirror.

Inflation Outlook and Price Freezes

At its last earnings release, Tesco put on a resilient face, expecting trading to be generally in line with the past year. The CEO did warn about inflation but said he saw price growth moderating in the latter half of the year. With rivals such as Asda and Sainsbury freezing prices to gain market share, inflation expectations are likely to be the main focus for the trading update, with the firm expected to provide updated guidance for its operating profit and free cash flow for this year. Previously it had guided retail operating income to remain flat concerning the prior year, with FCF in the range of £1.4-1.8B, allowing it to maintain its current dividend.

Since the company last updated investors, the ONS has reported that the inflation rate has come down substantially, aided by energy prices. CEO comments on the perspectives for pricing for the rest of the year might be vital in getting the stock price to break out of its range for this month, mainly whether Tesco will try to take on rivals by joining in with the price freezes.

Tesco in Sideways Pattern

Tesco prices have traded sideways in June between 260 and 267, with an evident double-bottom formation opening up speculation for a short-term leg towards the upper range. Breaking outside the consolidation pattern might expose 271 to the top and 255 to the bottom unless momentum brings 277 and 248 in focus. In both cases, there appears to be a flag pattern, with the low likely in the former case and increased chances of reaching the top of 285, whereas a lower low would be expected in the latter case.

Key Takeaways

Tesco, the largest UK grocery retailer, is set to release its Q1 trading update. Tesco has faced several issues recently, including losing market share to budget competitors Lidl and Aldi. Although Tesco customers are more vulnerable to price increases, the company's sales have risen by 8.9% in the year to May, keeping up with inflation. However, at its last earnings release, the CEO stated that he saw price growth moderating later in the year. Tesco is expected to provide updated guidance for its operating profit and free cash flow for this year, particularly concerning inflation expectations. The key to getting the stock price to break out of its range would be whether Tesco will try to take on rivals by joining in with price freezes.