Although Tesco upgraded its profit outlook as it announced its Q3 results, the Tesco share price fell 2% in early trading, as shareholders may have expected results to be even better.
However, the Tesco share price's recovery since hitting a 52-week low last March reflects the turnaround started by previous CEO Dave Lewis and continued by his successor Ken Murphy.
Tesco share price bounces back
Since the accounting scandal that sent Tesco shares tumbling to a 19-year low in 2016, it’s been a long road back for the company's stock. However, throughout that period Tesco has remained ensconced as the UK’s number one supermarket, although its share of the country's grocery market is no longer above the 30% mark, as it was a decade ago.
Over the last few years the UK grocery sector has seen increasing competition from the discount retailers Aldi and Lidl, whose market shares have risen from a combined 4.4% in 2011 to 7.9% and 6.4%, respectively, based on latest data.
In 2021 Tesco increased its market share to 27.9% from 27.3% in 2020, as it consolidated its position ahead of Sainsbury’s and Asda.
Tesco's Q3 results build on strong performance in H1
When Tesco reported its half-year numbers in October, the company highlighted a 2.6% rise in group sales excluding fuel to £27.3bn, up from £26.7bn the year before. Today's announcement revealed that group sales continued to grow in Q3, rising 2.3% on a like-for-like basis compared to a year ago.
Sales in the UK increased 0.2% in Q3. While this was below expectations of 0.6%, it is impressive when compared to the tough comparatives of last year. Compared to two years ago, UK sales were up 6.9%.
Once again, Tesco's Ireland operation lagged behind, posting a 3.3% year-on-year decline in Q3 sales, although on a two-year basis sales are up by 7.8%.
The performance of Booker, Tesco's wholesale operation, stood out, with Q3 sales up more than 16% compared to the same period in both 2020 and 2019. Growth was driven by the reopening of restaurants, bars and other hospitality venues.
Tesco raises profit outlook
As a result of strong sales growth in Q3, Tesco said that adjusted retail operating profits, which were revised upwards in October to between £2.5bn and £2.6bn, are now expected to exceed that range.
However, shareholders seemed strangely unimpressed by the announcement, as the Tesco share price fell more than 2% in the first 30 minutes of Thursday trading. This seems a somewhat churlish response, but was perhaps a reaction to the shares having recently reached their highest levels for 11 months. It certainly doesn’t mean the Tesco share price can’t go higher in the long term.
M&S also reports strong sales
Marks & Spencer, which today also reported strong growth in Q3 sales, has seen its share price rise in recent months. The company attributed its solid Q3 results to the improved performance of its food retail division, where sales climbed 19%.
M&S said that its general merchandise division, which for so long has been a drag, also performed well, with clothing and home sales increasing 3.2%. It could be that M&S' decision to sell the products of third-party retailers like FatFace and White Stuff via its website has helped improve turnover.
As at Tesco, the positive Q3 results prompted M&S to upgrade its outlook for the financial year, reinforcing the idea that, in the face of strong competition, traditional retailers are successfully adapting to the challenges of the pandemic and online shopping. This is not before time, and is a welcome development for shareholders.
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