Will Easing Inflation Help Tesco Shares?

Tesco’s share price has climbed 7.38% since 17 August, as UK shop price inflation declined to its lowest level in almost a year, driven by slowing food costs. The UK’s largest supermarket has also been boosted by sales gains and broker upgrades, while Tesco Ireland has unveiled an €80m plan for new shops and upgrades to 50 stores.

• Falling food prices sends shop price inflation to 11-month low.
• Recent sales rise outperforms wider market.
• Brokers increase Tesco earnings forecast and price target.

Tesco’s [TSCO.L] share price managed to maintain its recent upward momentum last week, and has climbed 7.38% since 17 August. This is on the back of the latest data showing UK shop price inflation declined to its lowest level in almost a year, driven by slowing food costs.

Tesco shares closed at 264.70p on Friday 1 September, just 7.22% below the 52-week high of 285.30p set on 10 May. The shares are up 21.14% year-to-date.

The UK’s largest supermarket has also been boosted by sales gains relative to the wider market and broker uplifts, while Tesco Ireland has unveiled an €80m plan for new shops and upgrades to 50 stores across the country.

Easing Shop Price Inflation Boosts Tesco Shares

UK shop price inflation fell to its lowest level since October 2022 last month, driven by easing food costs, reported the Financial Times. Last week’s British Retail Consortium (BRC) data showed the annual shop inflation rate dropped to 6.9% in August, down from 8.4% in July. Food inflation slowed from 13.4% to 11.5% in August, marking the lowest level in a year.

Vastly inflated food and energy costs have driven the cost of living crisis, and been a huge challenge to the UK’s supermarkets, pressuring already-thin margins and intensifying competition, particularly from the discounters Lidl and Aldi. This has put the brakes on Tesco shares over the past 12 months, as the supermarket has focused on value and customer loyalty.

However, the BRC figures suggest the slowdown in food price inflation is finally offering some welcome relief for millions of households, offering hope that Tesco’s share price reaps the benefit as consumers return to buying more higher-margin items.

Tesco See Sales Gain

Tesco gained market share despite slowing sales growth in the sector overall, the latest data from NIQ showed. In the four weeks to 12 August, Tesco’s sales value grew 9.7%, faster than the overall rate, which slowed to 7.2%, reported The Grocer. New shoppers and an uptick in store visits helped Tesco, while Aldi, Lidl and Marks and Spencer [MKS] also made gains.

Shore Capital’s Clive Black attributed Tesco’s outperformance to its Clubcard Prices programme, saying that “the loyalty initiative is helping the UK market leader gain share in recent times, alongside good execution and its price-matching activity with Aldi”.

Brokers Sweet on Tesco Shares

A double broker boost helped Tesco’s share price gain 1.60% to 260.10p on 25 August, after Barclays raised its price target from 320p to 325p, and UBS upgraded its full-year earnings forecast for the supermarket giant by almost 4%, to £2.6bn. The investment bank also reiterated its ‘buy’ recommendation, with a price target of 300p, noting that Tesco shares are “intriguingly cheap”, having slipped back from the May highs.

The broker added that Tesco’s upcoming interim results on 4 October could help to shift investor attention away from concerns around deflation, with greater focus instead on recent trading activity, saying “Tesco’s momentum and execution… points to strong profit growth in the first half”.

€80m Stores and Upgrades Plan

Tesco Ireland has announced it will spend €80m this year on eight new Tesco Express stores, as well as shop refits and refurbishments for 50 stores. Tesco Ireland COO Geoff Byrne said: “We have an ambitious development strategy for the business and are very excited to be expanding our Tesco Express model”, adding that the smaller stores are “proving very successful in urban settings, and [this] reflects evolving consumer demand for greater convenient shopping opportunities in high footfall areas”.

How Are Analysts Viewing Tesco’s Share Price Prospects?

The 10 analysts polled by the Financial Times offering 12-month price targets for Tesco have a median target of 303.00p, with a high estimate of 330.0p and a low estimate of 235.00p. The median estimate represents a potential upside of 14.47% versus last week’s 264.70p close. Supporting Tesco’s share price forecast, analysts are overwhelmingly positive on the stock, with three ‘buy’ recommendations, alongside eight ‘outperform’ and two ‘hold’ recommendations.