Tesco: Large Stores and Online Market Share Gains Drive Top-Line Growth

Tesco TSCO announced a first-quarter trading update with retail like-for-like sales up 8.2%, with the U.K. and Ireland sales up 8.8% (U.K. up 9%, Republic of Ireland up 7.3%, and Booker up 8.4%). Booker remains a strong contributor with like-for-like sales growth at 8.4%, which with the U.K. (up 9%) were the standout performers for the group. From a channel perspective large stores outperformed, growing 9.9% in the quarter versus 5.9% sales growth for convenience stores and 8.2% sales growth for the digital channel, with Tesco commenting on online market share gains (up 75 basis points to 37.5%). Management confirmed fiscal 2024 guidance calling for a “broadly flat level of retail-adjusted operating profit and retail free cash flow within the target range of GBP 1.4 billion to GBP 1.8 billion” versus close to GBP 1.8 billion in our model. Although we don’t expect to alter our GBX 298 per-share fair value estimate, we reiterate that no-moat Tesco is one of the best-positioned grocers in our Europe coverage. At the current share price and despite a 14% share price appreciation year to date, Tesco’s expected returns look attractive versus peers. We attribute this to a 7% cash return to shareholders through a regular dividend (about a 4% dividend yield in our estimates) and a stepped-up share buyback program. Tesco also has dominant offline (27% market share), online (37.5% market share), and food-service (largest player) positions in the core U.K. market, and potential upside from ad opportunities in the digital platform and automation-driven online fulfillment efficiencies.