Shares in UK grocery chain Tesco (LON:TESCO) dropped after the firm posted Q1 underlying sales growth which missed analysts’ expectations. However, the firm reiterated its FY operating profit and free cash flow targets, lending some support to the stock.
Hoping for sunshine
For the 13 weeks to 30 May, Tesco posted UK LFL sales growth of 1.8%, below the 2.7% Bloomberg consensus. Growth was also below that of the previous quarter, when sales rose 3.1%, although that period included Christmas.
The firm pinned the slowdown on an ‘exceptionally strong prior-year period supported by record-breaking weather and competitor disruption’. Food sales rose 2.6%, with sales of premium Finest products up 9% during the quarter.
To attract more convenience shoppers, the group extended its Aldi Price Match promotion to over 2,000 Tesco Express stores. Meanwhile, it sent almost 100 million tailored offers to customers through the Your Clubcard Prices promotion.
CEO Ken Murphy said he was pleased with progress against an ‘exceptional’ prior-year period but was hoping for some sunshine. The company confirmed its FY27 targets of £3 billion to £3.3 billion of operating profit and £1.5 billion to £2 billion of free cash flow.
Tesco doesn’t divulge price and volume data, but we suspect it is holding down prices to maintain market share. This is what it means when it says it‘s ‘investing in the business’, a phrase which is curiously absent from today’s update.
According to Worldpanel, UK grocery sales rose 2.3% in the 12 weeks to 17 May. That’s entirely consistent with Tesco’s overall UK sales growth of 2.4%, so we would expect similar price/volume dynamics to apply.
For the last nine months, volume growth in the UK grocery market has been negative. In other words, we’ve been buying fewer items than we did a year ago. At the same time, annual food price inflation has fallen from around 5% to 3%. That may not seem like much, but it limits supermarkets’ ability to raise prices.
It’s fair to highlight last year’s ‘exceptional’ Q1 growth, which benefitted from lots of sunshine and disruption to competitors. However, with Aldi and Lidl accounting for nearly one pound in every five, Tesco has a fight on its hands.
On the conference call, the CEO said he would do ‘whatever it takes’ in terms of price, quality and customer service. That doesn’t mean he’s starting a price war, but it does mean being competitive and investors need to grasp that.
Read the press release here:
https://www.tescoplc.com/investors
