Milestones on a familiar path
This is indeed not the same Tesco of Q1 2014. We need look no further for evidence of its radical transformation than the confirmation that it has notched a sixth straight quarter of underlying grocery sales growth. That's despite tightening inflationary pressures—underlined by data this week showing earnings after inflation shrinking at the fastest pace since 2014—putting Tesco, as Britain’s biggest retailer, in the tightest part of the vice.
The reinforced group is now in a better position to ‘invest in price’. A liberal peppering of Friday’s statement with references to competitive pricing like “price reductions”, “lowered prices”, “reducing prices”, and its “Trust in Price” ‘Spotlight measure’, leaves no doubt that price remains at the heart of Tesco’s strategy. The release of a £329m provision intended to cover the potential tax impact of the sale of its Korean business in 2015—no further CGT is payable—looks, after currency adjustments, destined to bolster price investment as well.
However, with shares having peaked on Friday with a rise of 1.4% and currently trading slightly in the red, investors do not appear to have found any strong reasons to upgrade 2017/18 profit expectations from the current widely forecast c.£1.5bn. Residual concerns about profit growth, quite fairly, remain. Price remains the only game in town right now, and it’s one Tesco has lost before, when the ongoing battle between established grocers and Aldi and Lidl contorted big grocers into deeply unhealthy shapes.
A recalibration of Tesco’s cost base under the long-term plan to remove £1.5bn will leave it less exposed this time. But the discounters recently marked their fastest sales growth since January 2015 and gained market share, while prices continued to rise. Investors are therefore zeroing in on the beneficial effect of inflation on continually expansive Aldi and Lidl. Concerns over the potential impact on Tesco growth in 2018/19—which have seen its shares drift 13.5% lower this year, underperforming rivals—are likely to persist.
The lack of any mention of Booker in today’s statement, the acquisition of which is meant to catalyse significant additional value via synergies, is no help with those concerns. Tesco prudently skirts round the CMA enquiry but at best, the watchdog could still insist on store disposals, muddying the already arguable case for a deal even further.
From a chart perspective, whilst Tesco's shares have certainly escaped the magnetic pull of the 13-year lows seen in January 2016, under 140p, the stock remains beset by clear selling interest that's emerged earlier this year between 190p-195p (marked on the chart below with a red rectangle).
- A gap that opened in the range in October 2016 was filled completely 4 months later and the stock has never successfully held on to the top side since
- Call it quantitatively driven institutional programme trading, or resistance based on valuation concerns, examining recent price action around the region shows that it's a real barrier
- Further confirmation of the hurdle comes from the confluence of Tesco's 200-day moving average and rising trend line from June 2016 which have successfully capped the shares above 178.45p support during the consolidation that has taken place for much of the year
- There's little indication at present that the stock is ready to break out. It's remarkable that the stock tagged 188p towards the end of May and that that price was Friday's reaction high
- On the other hand, 178.5p seems a solid enough benchmark for support, even if incursions below can't be ruled out. A turn for the worse, or better would be signalled by a breach of the either extreme of the consolidation zone
Source: Thomson Reuters and City Index - click to enlarge
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