Despite a decent set of full-year numbers back in April, the Tesco share price has slipped back over the last few weeks, sliding to a nine-month low earlier this month.
This caution has been dictated by a consumer outlook that has been cautious at best, and was something Tesco management warned about in April. Since then, we’ve seen UK inflation jump sharply with more to come, while the outlook for 2023 was for adjusted operating profits to fall modestly from last year’s £2.83bn, to between £2.4bn to £2.6bn.
Tesco share price and margins under pressure
Tesco pledged to continue its Aldi price match scheme and extend it to 650 lines, along with various Clubcard promotions. This determination to increase the pressure on the likes of Aldi and Lidl will inevitably put downward pressure on margins, with Tesco’s peers of Sainsbury's, Asda and Morrisons facing similar challenges, and today’s Q1 numbers are likely to reflect that decision.
Group like-for-like sales rose 1.5% year-on-year, however the UK and Republic of Ireland (RoI) business saw bigger-than-expected declines in sales volumes. UK like-for-like sales in Q1 fell by 1.5%, and by much more than was being forecast, while ROI like-for-like sales fell by 2.4%, with the retailer saying they were seeing early signs of changing customer behaviour, which suggests that customers are favouring lower margin own-brand items over branded goods
The Booker operation was very much the standout, with the catering side of that business helping to increase sales by 19.4% to £2.1bn, as it benefited from the loosening of lockdown restrictions driving turnover. Central Europe also drove a decent rebound; however, the comparatives were favourable with extended covid lockdowns helping to restrict sales a year ago.
Full-year guidance unchanged despite rising costs
Despite the challenges facing the business, Tesco kept its full-year guidance for retail adjusted operating profit unchanged. As we look ahead to the rest of the year, costs are set to remain a key pinch point, with rising fuel prices set to impact its delivery and logistics operations, a problem the likes of Aldi and Lidl don't have to the same extent.
Higher staff costs will also act as a brake, with the supermarket pledging to increase staff wages in its efforts to retain service levels, raising salaries by 6%. Tesco's management are taking some measures to mitigate these rising costs, with the food retailer currently in the midst of a three-year cost-saving programme, with the aim of cutting £1bn. Tesco's share price is down 0.30% at 248.95p an hour into Friday's trading session.
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