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Tesco FY earnings: brighter times ahead or will management highlight the pandemic risks to come

One year into the pandemic and Tesco along with other food retailers have been the bright spot for the sector. What to expect from its full year earnings?

Tescos Source: Bloomberg

When does Tesco report earnings?

Tesco (TSCO:LN) publishes its preliminary full year (FY) earnings on Wednesday 14 April and while the numbers will lay bare the detail from this last year the company will want to look ahead and demonstrate its preparedness for the future.

Tesco earnings – what to expect?

This time last year the FY earnings came as we were going into one of the biggest periods of uncertainty and, as history has proved, supermarkets have come out of the pandemic in better form than many had hoped. The sector managed the restricted supply well and the demand even better. Yes, there were empty shelves, but that was not the supermarkets failure, rather social media generated scare stories of a country running out of toilet rolls, bread flour and yeast. Yes, we had to queue, but it was, on the whole done well and those of us that had to go into shops, it was a relatively safe place to be.

The sector took government help, but has, by and large, paid it all back and over the last year it has done well to adjust, as we have all done, to a new way of doing things. Could it have been done differently? Yes, almost certainly, but in the circumstances the supermarkets have done well.

How this will be reflected in Tesco’s FY results will be laid out, but its main business, of keeping the country fed, has done well.

What to look for

So what do we expect? Tesco said at the recent trading update that ‘our guidance for the 2020/21 financial year is unchanged: we remain confident that retail operating profit is likely to be at least at the same level as in 2019/20, excluding the repayment of business rates relief.’ That relief repayment was £585 million so that has to be taken off any number seen last year.

Has online been the saviour?

Clearly Tesco, along with other food retailers, have been the bright spot for the sector during the pandemic. Demand has kept up and, with the already established online delivery services in place, Tesco has been able to provide for its loyal customers. But the so called ‘last-mile’ delivery business model is not a profitable part of any retail operation.

Investment house Exane says before the pandemic Tesco had pre-tax profit margins of 5pc from in-store sales, however, it was making a loss of 4pc of the value of every online order. This clearly cannot continue, but Tesco’s online operation has seen a big increase in demand. Basket sizes have increased, which goes someway to increase margins and, with an efficient logistics department, each delivery lorry has to travel less distance between households. So, it will be interesting to see what Tesco says about this, but don’t hold your breath for this loss to turn positive any time in the near future.

Where the pressures?

There are also two other areas that will be of interest, its wholesale division, Booker, which has exposure to the hospitality sector and Tesco Bank. While Booker saw an increase in volumes in the last quarter Tesco Bank saw total sales drop 28.5%, a reflection of the difficult circumstances being felt by its client base.

Dividend payments

On the dividend front no change is expected on what was seen last year. Adding to the coffers was the sale of its business in Thailand and Malaysia, so this will help, but circumstances, while better than some has expected mid-year are still tough.

Tesco share price: trading the results

In terms of the chart, at the time of writing, the trend from recent lows at 217 stopped at 236.5 forming a line of resistance.

Tesco chart Source: ProRealTime
Tesco chart Source: ProRealTime

This recent rally coincides with the news from the government, of the lockdown taper plan, which has had a positive effect on many sectors. This will be the level to watch if the company does manage to surprise traders on the upside. A candle close above that 236.5 line of resistance would than suggest that there a clear run up to 250.7. This upside is supported by the oscillator at the bottom of the chart. That indicator represents the moving average divergence convergence (MACD), and highlights the upward momentum in recent price action.

Any long position from current price action would be supported by a stop loss below the 217.2 level, at about 215.

But what about the downside? There has recently been a bearish crossover of moving averages. The red 50-day simple moving average (SMA), has crossed down to below the blue line, that’s the 100-day SMA. While this is not the dreaded death cross, of a 50-day crossing below a 200-day SMA, nonetheless is an indicator of a soft trend reversal. This means that there is a potential change in the air.

So, where is the downside support?

Using the Fibonacci retracement tool there is support kicking in at the 61.8% retracement at 224.6 then another significant Fibonacci level of 76.4% at 221.8. If there’s a break of those levels then the 100% retracement all the way down to the main support line is expected at 217.2.

Any short position would be accompanied by a stoploss just above 236.5.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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