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Tesco PLC TSCO

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Morningstar’s Analysis

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Strong H1 for Tesco Leads to Higher Profit Guidance and Share Buybacks; TSR Attractive vs. Peers

Analyst Note

| Ioannis Pontikis, CFA |

Tesco announced first-half 2022 results with sales of GBP 30.4 billion, up 5.9% and EBIT at GBP 1.46 billion, up 40.6%; a strong set of numbers reflecting resilient second-quarter performance in large stores (up 6.9%), convenience (down 1.7% from down 8.2% in the first quarter), food (up 0.7% versus down 2.1% in Q1 due to the stockpiling impact) and clothing (up 35.9% versus 52.1% in the first quarter). Booker was also a strong contributor, with retail's two-year LFL at 19.4% and catering's one-year LFL at 54.4% (positive impact from acquisition of Best Food Logistics). Retail operating profit in the U.K. and ROI grew robustly by 16.5% due to lower coronavirus costs, stronger nonfood margin mix and operating efficiencies that offset inflationary pressures, with similar contributions for Central Europe (profit up 18.6%). Tesco Bank surprised on the upside, with Tesco now expecting profitability of at least GBP 120 million in fiscal 2022 (versus GBP 85 million in our model). More importantly, Tesco raised retail profit guidance to GBP 2.5 billion-2.6 billion from about GBP 2.3 billion before, versus GBP 2.54 billion in our model, which is higher than company-compiled consensus of GBP 2.47 billion. Although we don't expect to materially alter our GBX 273 fair value estimate for Tesco, accounting mainly for better-than-expected bank profitability, we reiterate Tesco is one of the best-positioned grocers in our coverage. On the current share price, with over 6% cash return to shareholders through a regular dividend (about 3.8% fiscal 2022 dividend yield in our estimates) and just announced ongoing share buyback program (GBP 500 million or 2.5% of market cap), dominant offline (27% market share), online (35% market share) and food service (largest player) position in the core U.K. market as well as potential upside from ad opportunities in its digital platform and automation-driven online fulfillment efficiencies, Tesco expected returns to look attractive versus peers.

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Company Profile

Business Description

Tesco is one of the world's leading food retailers, running thousands of stores across the U.K., Ireland, and Europe, while it recently divested its Asia business. According to Kantar, it is the leader in the U.K. with around 27% market share, nearly double rivals Asda and J Sainsbury. Tesco is multiformat, running a core supermarket chain but also convenience and neighbourhood stores. The group has a leading position online, with 35% 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.

Contact
Kestrel Way, Tesco House, Shire Park
Welwyn Garden, AL7 1GA, United Kingdom
T +44 3301239928
Sector Consumer Defensive
Industry Grocery Stores
Most Recent Earnings
Fiscal Year End Feb 27, 2022
Stock Type
Employees 361,771

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