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Highlights:
- Tesco’s interim profits exceeded market expectations, with adjusted profits of £1.65 billion.
- The company's free cash flow of £1.3 billion allows for ongoing investments and disciplined expansion.
- Analysts predict further upside for Tesco’s stock, driven by earnings growth and a £1 billion buyback program.
Tesco PLC (LSE:TSCO) delivered robust interim results, exceeding market expectations and prompting a slight upward revision to its full-year profit guidance. Analysts and investors responded positively to the results, which showed strength in both retail and banking divisions, and confirmed the company’s ability to thrive in a shifting UK grocery landscape.
Profits Beat Expectations
The supermarket giant reported group adjusted profits of £1.65 billion for the first half, significantly ahead of the consensus estimate of £1.53 billion. Tesco’s retail operations also performed well, posting profits of £1.56 billion compared to the expected £1.49 billion. Tesco Bank outperformed, delivering £94 million in profits, boosted by £42 million of one-off benefits linked to its sale to Barclays.
Despite this strong performance, second-quarter like-for-like (LFL) sales growth of 0.6% came in slightly below UBS’s forecast of 1.0%, though the investment in targeted value initiatives was seen as a positive response by customers.
Strong Cash Flow and Stable Outlook
Tesco’s free cash flow from retail operations reached £1.3 billion, comfortably beating forecasts of just over £1 billion. This strong cash flow allows Tesco to continue reinvesting in its operations while maintaining a disciplined capital strategy. Analysts at Shore Capital praised this "measured expansion" and emphasized the company’s good capital discipline, noting the resilience of the UK grocery market.
The outlook for the UK grocery market remains positive, with volume growth starting to emerge as inflation eases. Tesco is expected to benefit from this trend, with annual sector revenue growth projected to range between 2.5% and 4.5%, well ahead of new retail space additions. This provides a solid foundation for stable gross margins and the potential for increased operating returns.
Market Reaction and Further Upside
Frederick Wild of Jefferies highlighted that Tesco’s stock has already risen over 25% this year, reflecting a growing appreciation for its strengths. He pointed to a 7% earnings before interest and tax (EBIT) beat as the key focus of the results, while noting that the guidance upgrade, although modest, was still encouraging.
Shore Capital’s Clive Black suggested that Tesco’s re-rating could continue, fueled by ongoing earnings growth and strong free cash flow. Tesco’s buyback program, worth £1 billion for the year, adds to its positive outlook, along with proceeds from the pending sale of Tesco Bank.
