Analyst Note
| Ioannis Pontikis, CFA |Tesco announced its first-quarter fiscal 2022 trading update with group like-for-like sales up 1% at group level (versus down 0.85% for VA consensus) and 0.5% (versus down 1.8% for VA consensus) in the core U.K. segment, ahead of expectations. Booker like-for-like sales growth was up 9.2% with strong catering sales recovering (up 68%) and more than offsetting weak retail growth (due to tough comparables), while online sales were up 22%, a function of the annualisation of higher capacity in last April (demand remains high at 1.3 million orders per week with two-year sales growth of 82%, Tesco is also by far the largest player in the online grocery market with an estimated 35% market share). In the U.K., sales growth was also driven by strong contribution from general merchandise and clothing (up 10.3% and 52%, respectively). More importantly, Tesco said that it maintained its "Aldi Price Match" scheme on more than 500 lines and strengthened its price position against peers. We think the two-year like-for-like growth of 9.3% in the U.K. reflects sustainable benefits for Tesco and the grocery market at large with customers consuming more meals at home versus the pre-COVID-19 period. Although we do expect this to moderate somewhat as restrictions ease in the future, we see food at home consumption constituting a larger part of households' budgets going forward (versus the pre-COVID-19 regime). On the other hand, Tesco Bank sales were down 10%, but this includes growth later in the quarter as the company starts to lap COVID-19. Although we expect sales to gradually normalise in 2021 for supermarkets, this could have positive mix effects as people return to stores and Booker resumes organic growth (catering business rebounds as dine-in restaurants normalises). We maintain our fair value estimate for Tesco. Shares trade in 3-star territory.