Tesco shares fall despite profit guidance upgrade

Shares in Tesco declined on Thursday despite the supermarket giant raising its profit guidance following a strong Christmas trading period, as the retailer faced fresh allegations of profiteering in the midst of a cost-of-living crisis.

The retailer now expects adjusted operating profit forecast to total £2.75bn for the 12 months to 28 February 2024, ahead of previous guidance of £2.6-2.7bn.

In a period in which it cut nearly 2,700 prices to compete with the rest of the Big Four supermarkets and discount chains, the company was slammed by the Unite union for running a "profiteering gravy train".

“At a time when food prices continue to rise and millions of people are still struggling to feed their families, Tesco have been raking in bumper profits on the back of profiteering," said Unite's general secretary Sharon Graham. “Corporations like Tesco have done very well out of the cost-of-living crisis – unlike working people who have had to swallow inflated costs that have lined the pockets of the bosses and investors."

After an initial stint in positive territory, Tesco's stock was down 0.6% by mid-morning trade at 294.62p, having gained more than 20% over the past six months.

It's not the first time that Tesco – and other supermarkets – have been accused of profiteering, with Liberal Democrat leader Sir Ed Davey in May 2023 calling for increased scrutiny from Competition and Markets Authority into the sector. At the time, the CMA declared that it could not find any evidence of profiteering and did not pursue a full-blown investigation.

The country's biggest grocer said like-for-like sales increased by 6.6% across the group in the three months to 25 November, with UK LFL sales up 7.9%, ahead of the Citi estimate of 7.5% growth.

In the six weeks to 6 January, UK LFL sales were 6.8% higher than last year, which includes growth of 9.2% in the four weeks to Christmas. Meanwhile, Tesco Finest sales were up 16.7% on last year including a record Christmas week.

In the Republic of Ireland, LFL sales grew 8.3% during the third quarter, while the wholesale division Booker saw 3.9% growth on last year.

"We stepped up our investment in service over the key festive period, with more colleagues on the shop floor, helping to deliver market-leading availability and making this our best Christmas yet," said chief executive Ken Murphy.

During the third quarter, Tesco increased its market share in the UK and Ireland by 73 basis points to 24.5%, rising to 27.9% by Christmas.

Central European operations continue to be a weak point for Tesco, where LFL sales were down 1.4% year-on-year, though the company said price cuts and incentivised Clubcard Prices resulted in an improved performance across the period, with Christmas sales actually rising by 1.6%.

Over in the Tesco Bank division, sales were up 32.8% on last year in the third quarter, helped by the higher interest-rate environment and higher lending, while the insurance unit was helped by high levels of both renewals and new business.

Comment

Commenting on the results, Russ Mould, investment director at AJ Bell, said Tesco has "worked hard" to compete with German discount chains Aldi and Lidl, and its Clubcard price offers have helped build loyalty among weekly shoppers – with Clubcard members now accounting for 83% of total sales, up 3 percentage points on last year.

The strength of the Clubcard offering was evident "to such an extent that others have followed in its wake with giving better prices to loyalty card holders", Mould said. “The only worry there is the regulator has its eyes on this practice and whether it might be anti-competitive."

Unite also called on the government to take action against what it claims were "excessive profits". Unite's Graham said: "The government could easily choose to prevent companies exploiting a national crisis to bank grossly excessive profits. Instead, they simply let the gravy train continue.”