Tesco Preview: Can Growth Continue as Inflation Eases?

Tesco's share price struggled in June, but investors hope this week's trading update will help reverse the trend.

Recapturing Growth

The retailer will be looking to regain growth momentum. After crossing the psychologically important 300 GBX barrier following strong annual results, Tesco's shares have pulled back slightly. On Thursday, the company will provide its latest sales figures to investors ahead of its AGM. There is hope that declining inflation and improved economic conditions since last year's technical recession may have boosted sales for the low-cost retailer. Data shows Tesco has grown its market share in the first quarter, aiding positive expectations for the period.

Tesco's guidance forecast continued growth at a similar rate to last year, targeting an adjusted operating profit of £2.8 billion. Efficiencies and the planned sale of its banking arm later this year are also factored in. Thursday's update will focus solely on sales performance. Ongoing high single-digit like-for-like growth will likely be needed to meet analyst projections of nearly £70 billion in revenue and over £2.9 billion in operating profit for the year.

Managing Expectations

Last year, the company's strong performance resulted in the controversial doubling of the CEO's pay, a subject that may be discussed at the upcoming AGM. However, the substantial growth in sales also sets a relatively high benchmark for this year. Analysts are already forecasting a relative slowdown in sales growth over the winter period, with sales expected to increase by 3.4%, down from the 7.3% increase seen last year. Wetter weather and a slow start to spring in the UK have dampened demand for non-grocery items, which typically offer higher profit margins for the company.

Slower nominal sales growth is to be expected in an environment where prices are rising slowly. With expectations that inflation will continue to moderate, traders may focus on other performance indicators, such as the company's market share and trading outlook. Additionally, any update on sales at the banking division could garner significant interest. However, as the largest grocery retailer in the UK, which has posted the strongest growth in recent years, the company may be reaching the limits of its expansion potential.

TESCO in Wedge Pattern

The Tesco stock price has risen in a corrective manner, likely forming a wedge pattern before further increases can be seen. Support levels stand at the troughs of 270 GBX and 245 GBX, with 285 GBX as short-term support. On the flip side, if 300 GBX holds firm, a move past 315 GBX could follow, setting the stage for 330 GBX and beyond.

Source: SpreadEx / TESCO

Key Takeaways

Tesco's share price struggled in June, but investors hope that this Thursday's trading update will help reverse the trend and regain growth momentum as hopes that declining inflation and improved economic conditions may have boosted sales and Tesco's market share in the first quarter. Tesco's guidance forecasts continued growth at a similar rate to last year, with efficiencies and the planned sale of its banking arm factored in. Thursday's update will focus on sales performance. However, analysts forecast a relative slowdown over winter, with wetter weather and a slow spring dampening demand.