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.