There is a lot to like about Tesco’s results even though the company is guiding for profit to dip in its new financial year.
The supermarket has been working incredibly hard on a plan to fight off competition from discounters Aldi and Lidl, make its business run more efficiently, be more environmentally friendly and move with the times such as launching superfast delivery services.
The fruits of its labour are now shining through, with the business ticking many of the right boxes.
Sales and profit are up, net debt is down, free cash flow is better than expected, there is a big jump in the dividend to please shareholders, and the company continues to increase its market share.
“Interestingly the supermarket experienced sales deflation for the year, which might come as a surprise given everyone is talking about the cost of living going up. That’s because Tesco has been working effortlessly to cut prices and it also participated in more promotions to encourage people to shop at its stores,” said AJ Bell’s Russ Mould.
“Inflation is an issue for the business, nonetheless. The coming months will be challenging for Tesco as it faces higher cost inflation and a potential shift in how consumers spend their money. That explains why its share price has fallen nearly 5% on the results, and why Ocado and Sainsbury’s shares are also weak.
“There is a real risk that cash-strapped families will cut back on their shopping. Even though we all need to eat and drink, there is a high chance that shopping baskets may not contain as many treats as households have been consuming of late. If everyone cuts back on a few items each week, this loss of income for Tesco will certainly add up.
“If this trend does play out as expected, it won’t just be Tesco feeling the pain. On a two-year basis, Asda, Morrisons, Sainsbury’s and Co-op have all lost market share and these businesses will certainly not want to see further bad news in the form of customers tightening their belts.
“In fact, if supermarkets suffers from people deciding to buy fewer chocolate biscuits or a nice bottle of wine, you can almost be certain that other consumer-facing companies such as fashion sellers and electronics retailers will also be experiencing a shift in how their customers are spending.”