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Shares in the UK’s largest supermarket, Tesco (LSE: TSCO) have been performing extremely well as of late. On the back of its share in the grocery market hitting a 10-year high, the stock is up over 25% in the past 12 months. Investors will undoubtedly be looking for signs that such positive momentum can be maintained in FY 2025/26, when it reports Q1 results on Thursday (12 June).
Price war
Top of investors’ priorities will be an update on the competitive landscape. Back in March, rival Asda, made waves when it announced it was slashing prices across nearly a third of its product range. In response, the Tesco share price fell heavily, but has since clawed back all the losses.
Price wars are hardly a new phenomenon in the grocery market. Unlike those we’ve seen in the past though, years of price increases across a basket of goods and services are really beginning to bite for many.
The days of 10% inflation rates may be gone, but prices on everyday products continue to rise on a year-on-year basis. Over the past three years, the purchasing power of the British pound has fallen sharply.
A risk of a downturn in the share price can’t be ruled out, should we see sustained promotional activity across the industry.
Last year, adjusted operating profit came in 11% higher at £3.1bn. This year it’s guiding lower, in the range £2.7bn-£3bn.
Product innovation
The retailer has a strong track record of fending off competitors, whether that be the discounters or other full-line grocers. Aldi price match and Clubcard prices are two initiatives that undoubtedly continue to resonate with shoppers.
On the topic of Clubcard, this year marks 30 years since its launch. It has undoubtedly been the single biggest innovation in the company’s history. Delivering deep customer insights, it remains a key differentiator.
The loyalty card’s longevity is testament to the company’s ability to find innovative means that continue to make it relevant. Recently, it launched a trial of ‘Your Clubcard Prices’. This offering provides tailored savings based on previous spending behaviour.
Cost of living
The ability of the retailer to protect its margins throughout the ebbs and flows of the business cycle is one of its greatest strengths. But with competition undoubtedly beginning to heat up even further this year, margin compression can’t be ruled out. Neither can cash profit and cash conversion.
The company’s ability to continue to thrive despite a cost of living crisis continues to bode well for further share price rises, in my opinion.
With the cost of eating out rising faster than the price of dining in, the retailer has significantly expanded its Finest range of products. Indeed, Finest has been the standout performer with sales up 15% year on year. In my book, the standout product is from the steakhouse range. I certainly enjoy the taste, anyway. For a company not automatically associated with a higher-priced range, annual sales at Tesco finest hit £2.5bn last year.
Having missed out on buying some shares during the sell-off in March, I’m now following the company, and will consider purchasing some of its shares after it reports later this week.
