Tesco results: What eight City analysts think after supermarket group posts sixth consecutive quarter of growth

Lucy White
Shoppers at the Osterley branch of Tesco
The analysts reactions to Tesco's trading update are mostly positive (Source: Getty)

Tesco shares were on the rise at the open this morning, as the supermarket leviathan recorded its sixth consecutive quarter of growth.

The news came at a convenient time for Tesco – although the Financial Reporting Council dropped its investigation into auditors PwC, employees are now under the spotlight and shareholders have been kicking up a fuss about the relocation package awarded to chief executive Dave Lewis.

The update neglected to mention the Booker takeover, as expected, but the response from analysts was generally positive ahead of today's annual general meeting (AGM).

Here's what they had to say:

1. Superstores a safe bet

"Following on from the somewhat gloomy trading statement from DFS Furniture yesterday that wiped a fair bit of equity value from the UK non-food retail sector, Tesco, Britain’s largest grocer, has delivered a broadly encouraging update that may improve the mood a little. Indeed, we believe that this update underscores our more sanguine approach to the UK superstore groups.

"Following this update from Tesco we would be surprised to see much change to consensus earnings expectations for the 2018 financial year. Following the analyst call we may catch up a little with the market and nudge our Tesco profit expectation a little higher but nothing structural, it should be said."

- Clive Black and Darren Shirley, Shore Capital

2. Moving in the right direction

"Recovery is continuing at Tesco, despite the squeeze on consumer incomes from weak wage growth and rising inflation. The going is still tough though, as the sector is highly competitive and a rising pound will put pressure on supermarket margins, so it remains to be seen just how much those higher sales will feed through into profits.

"Tesco is also facing the prospect of a rise in pension contributions because its scheme valuation is rather inconveniently taking place now, when interest rates are low and inflation is rising, both of which will serve to magnify the deficit. The supermarket is also in the process of compensating shareholders for the 2014 accounting scandal.

"However CEO Dave Lewis has undoubtedly got things moving in the right direction at the nation’s biggest supermarket. The proposal to take over Booker Group still raises concerns though, particularly given the shaky backdrop, but continued momentum in the core business will help to shore up shareholder support."

- Laith Khalaf, Hargreaves Lansdown

3. Streamlining was a good move

"Tesco is still faced with fierce competition from the likes of Aldi and Lidl, but it’s starting to catch up. Their focus on improving customer service and keeping prices competitive despite inflation seem to have paid off in terms of customer loyalty and it’s actually getting us coming back for more.

"These positive results suggest slimlining their operations by waving goodbye to a lot of 24 hour stores and fringe businesses, like Dobbies and Giraffe, last year was a good move by chief exec David Lewis. Their campaign 'Little Helps to Healthier Living' has evidently worked incredibly well for them and encouraged more people to turn to Tesco when they’re buying fruit, veg and other fresh goods."

- Hannah Maundrell, money.co.uk

4. Didn't send investors wild

"Tesco drew focus on an otherwise quiet morning, the supermarket revealing a muscular set of first quarter figures. Like-for-like UK sales jumped 2.3 per cent fuelled by a 2.7 per cent surge in food sales.

"That marks the sixth consecutive quarter of comparable sales growth for the company, and suggests that – in part thanks to engorged buying power – Tesco is managing to prevent its customers from feeling the pinch of rapidly rising prices.

"Yet investors didn’t go wild for the report. After opening more than two per cent higher the supermarket gradually saw its gains shrink, settling instead for a solid 0.8 per cent increase."

- Spreadex

5. Hasn't quite beaten down the discounters

"Consultant Kantar Worldpanel’s May data showed the FTSE 100 member increasing its market share by 0.3 per cent and growing sales by 1.8 per cent on a like-for-like basis in that month alone.

"Investors will also be pleased to hear that Tesco’s £1.5bn cost-cutting plan remains on track and the combination of costs down and sales up will boost hopes that the company can reach Mr Lewis’ 3.5 per cent to 4.0 per cent operating margin target by 2019 to 2020.

"Equally, the Kantar numbers show that Tesco is still going to have to work hard, as acknowledged by Mr Lewis when he refers to 'tough market conditions' in the trading statement.

"Despite the month-on-month improvement, Tesco lost market share on a year-on-year basis, from 28.3 per cent to 27.8 per cent, and its sales growth for May paled next to the 19.2 per cent registered by the discounters Aldi and Lidl between them.

- Russ Mould, AJ Bell

6. Lower real wages remains a threat

"Tesco has delivered a corker in its core UK market. Food, and fresh food in particular, is firing on all cylinders and that’s a huge shot across the bows for its competitors, in particular Morrisons.

"With inflation rising sharply, Tesco has used its immense buying power to keep prices lower for its customers. Against this inflationary backdrop, the numbers are all the more remarkable.

“But the toxic combination of rising inflation and low wage growth remains a major threat. As inflation continues to erode people's spending power, more and more of Tesco’s customers could be driven back to the discounters, Aldi and Lidl.

"Tesco’s looming merger with Booker could prove a distraction, especially as the Competition and Markets Authority starts its review, but if it goes ahead the deal will further cement Tesco's comeback."

- John Ibbotson, Retail Vision

7. Growth might quieten noisy shareholders

"Tesco are on a roll getting their customer mojo back: stores are easier, more engaging and comparatively better value than they were a year ago. Customer-centric decisions have helped grow sales six quarters on the bounce.

"Just when the FRC closed the investigation into PwC and their role in Tesco's accounting scandal, Tesco shareholders have something else to make noise about: the Booker deal and Lewis's relocation package. Shareholders may have initially baulked at Lewis's remuneration, but from what they used to have compared to what they have with Lewis, there is little to complain about."

- Phil Dorrell, Retail Remedy

8. Keeping prices down is key

"Tesco has surprised investors today by maintaining its resistance in raising prices, which boosted its sales growth to the strongest level in nearly seven years.

"The company has cut corners in reducing its costs but battled hard in not raising prices, which is the key element to keeping the tills ringing. It is an encouraging sign that their domestic same store surged by 2.3 per cent in the face of rising inflation."

- Naeem Aslam, Think Markets UK

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