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Tesco's Q3 and Christmas Trading Broadly in Line and Guidance Maintained; Shares Fairly Valued

Analyst Note

| Ioannis Pontikis, CFA |

Tesco announced its third-quarter and Christmas trading update with like-for-like sales up 5.6% at group level and 7.2% in the core U.K. segment, broadly in line with peers' trading (7.2% for Morrisons and 7.4% for Sainsbury's). Booker like-for-like sales were down 2.5% with strong retail sales (up 14%) being more than offset by coronavirus-driven weakness in catering (down 30% in the third quarter and down 49% over the Christmas period), while online sales were up 70% (versus 128% for Sainsbury's, Tesco is also by far the largest player in the online grocery market). On the other hand, Tesco Bank sales were down 27.7%, with management's expectation of an operating loss of GBP 175 million-200 million for the year unchanged, in line with our revised estimates (GBP 180 million in our model). Management reiterated guidance of retail operating profit levels this year similar to fiscal 2020 levels (excluding the repayment of business rates relief), under the "assumption of a continued easing of lockdown restrictions in the U.K.," which given current trading seems conservative. This is an implicit upgrade in guidance given GBP 85 million higher COVID-19-related costs since the last update (to GBP 810 million from GBP 725 million previously). We maintain our GBX 249 fair value estimate. Shares trade in 3-star territory.

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Company Profile

Business Description

Founded in 1919, Tesco is one of the world's leading food retailers, running nearly 6,700 stores across the U.K. and Ireland (which combine for 78% of sales and 63% of operating profit before exceptional items), Eastern Europe, and Asia. According to Kantar, it is the leader in the U.K. with around 27% market share, nearly double rivals Asda (15%) and J Sainsbury (15%). Tesco is multiformat, running a core supermarket chain but also convenience and neighbourhood stores; additionally, 11% of its global revenue comes from petrol. The group has a leading position online, with 40% digital market share in the U.K.Tesco gained exposure in the cash-and-carry and out-of-home delivered markets through the 2017 acquisition of Booker Group in a groundbreaking GBP 4 billion deal.

Kestrel Way, Tesco House, Shire Park
Welwyn Garden, AL7 1GA, United Kingdom
T +44 800505555
Sector Consumer Defensive
Industry Grocery Stores
Most Recent Earnings
Fiscal Year End Feb 28, 2021
Stock Type
Employees 410,458