FTSE 100: Tesco shares are up 9% year-to-date after Q3 results

Tesco shares (LON: TSCO) finished 2022 at 224p and have now jumped by 9% to 244p apiece. The FTSE 100 grocer, widely viewed as a benchmark for the UK’s retail sector, has barely moved on results day with market expectations of a strong quarter already baked in by positive news from Sainsbury’s earlier this week.

But as the retailer moves into calendar 2023, its performance and share price are facing a number of headwinds.

Tesco share price: Q3 results

In the 19 weeks to 7 January, group sales increased by a solid 6.6% to £21.8 billion, described by the company as a ‘strong performance’ with ‘particular strength in fresh food’ which rose by 8.1%.

Importantly, Tesco now holds 27.5% of the UK’s grocery market share according to Kantar, boasting ‘the only full-line grocer to increase market share vs pre-pandemic.’

This success can be attributed to a few key factors: its value for money has increased, with the ‘Aldi Price Match’ promotion on 600 key products working in synergy with Clubcard prices. Indeed, sales volume on Tesco’s ‘Everyday’ range of products increased by more than average at 7.4% in the period. Meanwhile the ‘Finest’ range also saw sales rise by 8.2%, though some of this growth was due to the range of goods offered increasing by 22%.

For context, Moneyboat research shows that Tesco’s Clubcard remains the highest ranked supermarket loyalty scheme, with Clubcard sales penetration at 84% and app users having trebled year-over-year to 1.8 million customers. This level of customer data continues to help Tesco maintain and grow market share,

And importantly, the FTSE 100 retailer is retaining online sales with growth at 59% compared to pre-pandemic levels and participation stabilising at 13%. Acquisition Booker also saw strong growth, while sales at Tesco Bank rose by 14.6%, ‘driven by an increase in credit card spending and money services transactions.’

Where next for Tesco shares?

Tesco has reconfirmed its FY22/23 guidance and expects retail adjusted operating profit of between £2.4 billion and £2.5 billion, with a retail cash flow of at least £1.8 billion.

CEO Ken Murphy enthuses he was ‘really pleased’ with the ‘strong growth at Christmas on top of the exceptional growth of the last few years.’ Citing ‘delivering relentless on the strategic priorities’ set out 18 months ago, the CEO believes that the FTSE 100 company has ‘good momentum...to deliver a strong performance relative to the market despite the challenging conditions ahead.’

However, Murphy acknowledges that Q3’s rising sales were driven primarily by increasing prices than people buying more, with the volume of goods sold actually slightly lower than in Christmas 2021.

This tracks with research from the British Retail Consortium and accountancy KPMG; while they found that UK retail sales jumped by 6.9% in December, KPMG head of retail Paul Martin warned that this was ‘largely due to goods costing more’ and ‘masks the fact that the volume of goods that people are buying is significantly down on this time last year.’

Of course, CPI inflation remains in the double-digits at 10.7%, with food inflation above 13%, and is causing significant problems with both food supply chains and consumer discretionary income. And while Murphy ‘thinks and hopes’ inflation will start to fall in H2 2023, the UK is entering a recession that the Bank of England predicts will last two years, and the tax burden has increased to levels not seen since the 1950s.

Naturally, Tesco is better able to increase prices in line with inflation than many other companies, but stiff competition and sinking consumer confidence means that striking a balance between pricing and volume will become much harder through 2023.

As consumers count the pennies, pressure to discount prices to maintain sales volumes mean that profit margins could become a problem: and margins are already razor-thin in the grocery sector.

On the other hand, the FTSE 100 is nearing a record high as investors flee to defensive stocks from the growth shares on offer at the FTSE 250 and NASDAQ. Tesco’s reliable 4.7% dividend is above average, and the stability offered by the titan remains reassuring in this volatile environment.

Full-year results are due in April.

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