Tesco Preview: Balances Gains Success with Market Challenges

The high inflation environment that has impacted UK consumers has allowed some grocery retailers to gain competitive advantages over their rivals, though whether they can keep up remains uncertain.

Building on Strong Results

Tesco saw meaningful outperformance in its share price last year, beating the broader FTSE 100 index. However, after reporting solid results over the holiday season, the company is seeing some momentum waning. Its recent performance sets a high bar that will be challenging to beat at the same rate. Analyst projections compiled by Tesco expect revenue and profit growth but perhaps not at the same pace as its share price increase. Failure to provide optimistic guidance could disappoint investors.

Analyst estimates foresee annual earnings per share (EPS) of 24 pence per share, improved from 22.1 in the prior fiscal year, as sales are projected to grow to £68.8B from £65.8B. Attention will focus on how much growth stems from improved sales and profitability and how much is attributable to inflation. Regarding the outlook, an expected moderation in inflation is viewed as providing a more straightforward path. Though Tesco's Christmas update already raised projections, the upside for future estimates is limited.

Leveraging Market Position

Tesco holds the largest UK grocery market share and often influences sector trends, consumer sentiment, and spending. It also faces competition as the second most popular retail chain in the UK after Aldi. The key question is whether Tesco can leverage its popularity to increase basket sales.

A recent consumer survey showed that Tesco and Sainsbury's are perceived as better than rivals acquired by private equity, which face high debt in this inflationary environment. Tesco's ability to offer lower prices through scale benefits has boosted store traffic amid inflation, though average UK wages are still outpacing price increases. While Tesco and Sainsbury's have gained market share from other UK grocers, discounters like Aldi have maintained theirs, posing a potential challenge if Tesco seeks higher margins from a consolidated customer base.​

Tesco in Possible C&H Pattern

Tesco's share price could form a cup-and-handle (C&H) pattern, as previously appeared between 285p and 282p. Failure to fall back below the swing support zone suggests prices may accelerate upwards once more, with 300p potential initial resistance ahead of a test of the double top resistance at 304p. However, should the stock lose footing at the local support instead, it could get exposed to a pullback towards 275p next, contingent on bears taking control of 282p.

Source: SpreadEx / Tesco

Key Takeaways

Tesco saw meaningful outperformance in its share price last year, beating the broader FTSE 100 index. However, analysts expect revenue and profit growth at a slower pace as its share price increases. As the largest UK grocery retailer, Tesco influences sector trends and faces competition from discounters like Aldi. The key question is whether Tesco can leverage its popularity to increase basket sales and maintain its market share gains amid high inflation.​