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Tesco shares suffer from economic headwinds

Tesco share price likely to slip further amid soaring inflation and drop in retail sales.

Tesco’s share price in the doldrums

Tesco’s share price, which started the year well by trading in 11-year highs close to minor psychological resistance at 300p, continues to slide and now trades in one-year lows as the cost-of-living crisis bites and soaring inflation negatively affects UK consumer spending.

August saw the biggest 2022 decline in UK retail sales to date when data showed a 1.6% month-on-month (MoM) decline following a 0.4% rise in July with rising interest rates and costs of living prices weighing on consumer spending, the British Pound Sterling, the UK stock market and especially retailers such as Tesco.

The escalating war in Ukraine, with Russia moving to formally annex regions such as Crimea and the Donbas which it has occupied since 2014, also dampen consumer sentiment and demand, and have pushed the Tesco share price to levels last seen in August of 2021, down over 22% year-to-date (YTD) compared to the FTSE 100’s decline of around 3.5%.

Despite the slide in the Tesco share price, most analysts expect the grocery giant to regain momentum as they hope for another busy and profitable Christmas which last year helped increase the grocery giant’s market share, which according to Statista as of June 2022 stands at 27.3 %, ensuring it continues to dominate rivals such as Sainsbury’s (14.9%), Asda (13.7%) and Morrisons (9.6%).

A Reuters Refinitiv poll of 17 top analysts shows that their median price target for the Tesco share price now comes in at 305p, down from 315p a month ago, and compared to its current 229p share price (as of 21 September 2022), or around 33% higher than at current levels.

While only one analyst continues to recommend a 'sell', two more now do so for a 'hold' compared to a month ago - seven in total -, six a “buy” versus nine at the end of August and three a “strong buy” versus four previously.

What to look out for ahead of Tesco’s interim results

With the next set of results not out before 5 October, market analysts will be looking beyond the UK’s current economic woes and see whether the new UK Chancellor of the Exchequer Kwasi Kwarteng’s mini budget on Friday will indeed help UK consumers and companies with their energy bills, as has been promised by the new British Prime Minister (PM) Liz Truss.

Meanwhile Tesco has added a new independent non-executive director, Caroline Silver, to its board, who according to Tesco chairman John Allan, is bringing 'valuable knowledge and perspective' to existing members. She will be starting her role on 1 October 2022, when she will also join Tesco’s audit committee while still being chair of healthcare company PZ Cussons and a non-executive director of insurance company BUPA among many others.

Allan said, 'her wealth of experience across a number of commercial, financial and governance roles, together with her investment banking and international experience, will undoubtedly bring additional valuable knowledge and perspective to the board.'

The UK’s largest supermarket has also revealed it is replacing the majority of manned checkouts from its larger stores in the coming weeks with self-service checkouts. Tesco said the decision was triggered by a 'lack of customer demand' for staffed checkouts and said that trials of larger self-checkout zones designed for trolleys rather than baskets had proved successful.

The decision has so far not been popular with many shoppers, with store staff frequently needing to address problems and overwrite the technology. Many Tesco shoppers have vented their frustration via social media with so far more than 237,000 people having signed a petition on Change.org calling on Tesco to stop adding more self-service checkouts and to bring back store staff.

From Tesco’s perspective the change to automation makes sense at a time where it is difficult for companies to find staff as UK unemployment is at its lowest level since 1974. Further advantages are an increase in productivity whilst reducing costs at a time when labour costs rise, and technology becomes cheaper and more reliable. Tesco also states that it wishes to enhance the customer experience for those who shun, in their mind 'unnecessary', human contact since Covid-19 pandemic.

What does technical analysis have to say?

For the past month Tesco’s share price has been trading in a clearly defined downtrend channel and has so far slid by over 15% from its mid-August peak which was made close to the 200-day simple moving average (SMA) at 267p.

The next technical downside target is the 50% retracement of the Covid-19 pandemic bull market at 220p. Further down sits the June 2021 low at 213p and lies the minor psychological 200p mark, slightly above which the March 2021 low and 61.8% Fibonacci retracement can be spotted at 203p.

Since the Tesco share price has been falling for the past five consecutive weeks, further downside likely remains in store as downside momentum retains the upper hand.

For the bulls to be back in control, a rise and daily chart close not only above the one-month downtrend channel line at 244p would need to be seen, but, more importantly, the early-September high at 257p would also need to be exceeded.

At present, the odds seem to favour further declines in the Tesco share price, though.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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 and quarterly summary.

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