Market initially reacted positively with shares up 4% as group continues to transition in a highly competitive sector

As Tesco updates the market Helal Miah, investment research analyst at The Share Centre, explains what it could mean for investors:

In a Q1 trading statement released this morning, Tesco demonstrated that recent momentum had continued into the latest quarter with like for like sales in the UK and ROI up by 2.3%. Interested investors may want to note that this was the sixth quarter in a row of sales growth.

Volume growth of just 1.3% during the period suggests that inflation was part of the driver of sales growth. However, the retail giant did state that it is working with its suppliers to limit price growth to the consumer. This is understandable given that the first to raise prices materially will feel the impact on the intense level of competition in the sector.

Tesco Counters (LGT)

Sales of fresh food have done particularly well as the group placed less marketing emphasis on General Merchandise. Tesco’s online grocery business continued to see good sales growth, up 4.8% while the company introduced a Monthly Delivery Saver subscription. Tesco Bank also experienced the same growth rate. Group sales grew at a more modest 1% as the group discontinued certain international operations.

These are good numbers and the market initially reacted positively with the shares opening up by over 4% this morning. What we are seeing is a business that is still in transition in a highly competitive market. While looking to keep hold of market share and limiting price increases, Tesco is also focussing on its cost structure. Indeed, it is implementing plans to reduce the cost base by £1.5bn, and it has closed depots in Welham Green and Chesterfield as part of the streamlining process.

Whilst we believe that the worst may be behind Tesco’s, the competition levels will continue to remain tough and margins therefore will not return to historic levels anytime soon. The dividend will be raised, but investors should appreciate that this will take a while to get back to historic norms too. We therefore continue to recommend Tesco as a ‘hold’ for medium risk investors seeking growth.

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