Tesco Earnings: Solid Performance Across the Board and Upgraded Guidance in Line With Our Estimates

Tesco TSCO announced fiscal 2024 interim results that included retail like-for-like sales up 7.8%. U.K. and Ireland sales were up 8.4% (U.K. up 8.7%, Ireland up 6.9%, and Booker up 7.5%). Booker remains a strong contributor, with retail and catering driving performance (up 14.2% and 11.6%, respectively) and tobacco the main detractor (down 5.9%). From a channel perspective, large stores continue to outperform, growing 9.3% in the first half versus 5.1% sales growth for convenience stores and 10% sales growth for the digital channel (13% of U.K. sales), with Tesco once again commenting on online market share gains of 71 basis points, close to 37.5%. Profit was up 17.2%, implying a margin of 4.4%, similar to prepandemic levels, driven by cost savings, volume growth, and a strong contribution by Booker.

Performance in Central Europe, on the other hand, has not been as bright as in the U.K. and Ireland home market. Profitability suffered due to local regulatory actions, namely price caps and mandatory promotions. Like-for-like sales grew 0.9% due to persistent inflationary pressures and the government stimulus program in Hungary being scaled back, affecting volume. Tesco Bank saw sales higher by 16.5%, driven by strong growth in the credit card business, with adjusted operating profit growing 25% to GBP 65 million.

Management upgraded its fiscal 2024 guidance to “GBP 2.6 billion to GBP 2.7 billion retail-adjusted operating profit and retail free cash flow within the target range of GBP 1.8 billion to GBP 2 billion versus GBP 1.4 billion to GBP 1.8 billion previously” and about GBP 1.8 billion in our model.

Given that we were previously ahead of consensus and guidance on free cash flow and now at the low end of the range, we don’t expect to materially change our GBX 298 fair value estimate. We reiterate that no-moat Tesco is one of the best-positioned grocers in our European coverage.