FTSE 100

Should you buy Tesco shares after first-quarter results?

Tesco’s share price will continue to find it difficult as the Covid-boost fades.

Tesco PLC (LON: TSCO) shares gained 1.74% on Monday after bouncing back from last week’s post-earnings pullback. Tesco’s share price had fallen 3.74% on Friday after reporting slower sales growth. The UK retailer said sales increased at a slower rate amid a fading Covid-19 boost.

Tesco experienced a significant increase in the top line in the preceding quarter due to increased supermarket sales. More people shopped for foodstuffs and groceries to cook at home instead of eating out at a restaurant.

However, the government is progressively lifting covid restrictions allowing people to eat out.

Did Tesco disappoint in the recent quarterly results?

Tesco said sales grew modestly by about 1.3% to £13.36 billion from the same quarter a year ago. However, last year’s quarter benefited from stockpiling as consumers shopped in fear of running out of foodstuff during lockdowns.

If you compare Tesco’s first-quarter sales against sales from the same period two years ago, the company’s top line grew 8.7%. Therefore, it is correct to conclude that although not overly impressive, the company’s sales growth is not as disappointing as it looks at face value.

In fact, when you look at the various segments of the business, Tesco is doing well. The company’s digital sales increased 22% from last year and 81.6% from two years ago. The two figures tell us that although online business benefitted from Covid, there is significant organic growth given that digital sales for the most recent quarter would have been affected by fading Covid-related boost.

Booker, the company’s hotel and Spa segment realised a 9.2% growth on a year-over-year basis, boosted by the lifting of covid restrictions. More people can now travel for holidays and vacations.

Fuel sales enjoyed massive growth of about 68% amid an increase in travel activity while the bank operations unit reported a 10% decline in revenue.

Therefore, Tesco seems to be doing well for now, but the question that is troubling investors is about the outlook.

Can Tesco bounce back after positive quarterly results?

Investors are not associating Monday’s rebound to last week’s strong quarterly results. Yesterday’s rally came about after a reported takeover of Morrisons by a US private equity firm fell through. As a result, UK supermarkets, including Morrisons, Tesco, Sainsbury’s, and Ocado shares, experienced an increase in their stock prices.

Therefore, investors are still concerned about the intermediate future of Tesco shares. One of the main reasons investors are reluctant to pay a high premium on Tesco shares is rising inflation. The UK CPI increased 2.1% in May, up from an increase of 1.5% in April. The UK consumer prices increased in each of the last four months, and analysts expect the same trend to continue in June and July.

This implies higher prices for consumer goods. Even giant retailers like Tesco will find it difficult to raise prices in the current economic conditions. Smaller retailers continue to crop up everywhere with challenging prices. Therefore, it becomes tougher for other retailers to pass the increased costs to the consumer.

Bottom line

Tesco’s share price will continue to find it difficult as the Covid-boost fades. However, investors can still find the stock attractive because of its high dividend yield of 4.43%. It will be important to watch how inflation rises in the next few months.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

Join the conversation