Tesco CEO optimistic about the future

The UK's largest grocer already said that it saw "early" indications of changing customer behaviour; now, with the half-year results, it's not "too early" to provide an outlook.
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How bad is it?

Tesco's CEO provided an upbeat tone following its latest trading update, saying that shops were trading well and that there was no difficulty in passing costs on to consumers. However, he did mention that shoppers were increasing frequency, but with a smaller basket. A sign that back in June, shoppers were already starting to face some of the pinches from inflation.

Tesco's position as a budget retailer might help when it comes to consumers becoming more price conscious, but it is facing increased competition from Aldi and Lidl in that area. Tesco's market share has dropped a percentage point since this year's start, with growth seen in the two German budget grocers. On the other hand, Tesco saw an increase in sales in its central Europe division. Like-for-like sales were reported lower in the primary market, despite higher pricing.

It's about the outlook

Traders will likely be keen to see if Tesco can maintain its operating profit guidance, which was last said to be in line with the prior year. The other point is Tesco's financial arm. Usually, banks do better during higher interest rate environments because they can get a larger spread. But Tesco's credit cards are meant to support store purchases so higher rates can have a counterproductive effect.

With the company already acknowledging that shoppers were shifting to groceries from other items, next to get scrutiny are likely to be inventories and operating margin. Given the firm's relatively low gearing below 20%, it might be in a position to avoid discounting to move inventory. The positive financial view might be further bolstered if Tesco continues the share buyback programme, given that the latest tranche was announced in July.

TSCO near 5-year low

Tesco's share fell to a nearly 5-year low early in the week, reaching a price of 200GBX before recovering to 207GBX. The stock slid through the descending channel in late September, adding to the trend's acceleration. But the round support combined with the 161.8% Fibonacci extension of 240-305GBX might provide traders an opportunity for a rebound at least. On top of that, a Harami candlestick has formed, allowing speculation of a reversal.

As long as the share price of Tesco trades below the 138.2% Fibonacci extension at 220GBX, chances for some respite are slim. If bearish momentum increases, the next level down is at 180GBX. This is the measured move low when extending the Fibonacci 200%.

Key takeaways

Despite increased competition from budget grocers, Tesco's CEO is optimistic about the company's future. Sales have been lower than expected in the primary market but higher in central Europe. Traders will be watching to see if Tesco can maintain its operating profit guidance in the face of higher interest rates. They will also look at the company's operating profit guidance, financial arm performance, and inventory levels.