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The last 12 months have been a good time to own Tesco (LSE:TSCO) shares. While there have been a few bumps along the way, the UK’s leading supermarket chain has seen its market share expand. And subsequently, the retail stock has enjoyed a 24% rally.
But the question now is, can Tesco shares continue to climb even further?
Optimistic price forecasts
Long-term, multi-year share price forecasts always need to be taken with a health dose of scepticism. Projections are naturally riddled with inaccuracies and assumptions that often fail to materialise, especially when looking to the long term.
Having said that, these can still be useful tools for judging growth potential. And right now, they suggest Tesco’s sitting on some solid growth possibilities.
By August 2027, one analyst has projected that the stock could climb to 560p. That’s around 37% higher than where the shares are trading today, and it’s enough to transform a £20,000 investment today into around £27,320.
So what needs to happen for this price point to materialise?
Crunching the numbers
The industry average price-to-earnings ratio for grocery retailers is currently around 19. Assuming that Tesco rises to this level over the next two years, a share price of 560p would require an earnings per share of 29.5p. That’s around 28% higher than what the supermarket chain has produced over the last trailing 12 months.
So what are the growth catalysts that could propel Tesco to reach this target?
For starters, Tesco will likely need to continue taking market share away from its competitors. So far, that hasn’t proven to be too challenging with the rising popularity of its Premium and price-matching offerings.
When paired with the vast competitive advantage of its Clubcard loyalty scheme, Tesco seems to be attracting shoppers covering almost all household budgets. And more sales volume means more profit, especially if it can continue to boost the popularity of its higher-margin Tesco’s Finest range.
Another way to grow earnings is through margin expansion. Management has already delivered substantial annual cost savings in recent years, with another £500m targeted for its 2026 fiscal year (ending in February).
Continued savings pave the way towards more financial flexibility. But it also supports the group’s recently-launched £1.45bn share buyback scheme that will help elevate the earnings per share figure as well.
Risk versus reward
Tesco seems to have multiple levers available to grow its earnings per share and support the 560p target. But there are important risks to consider.
Weakness in the wider British economy will likely put pressure on sales volumes. While the business has historically proven to be quite resilient during economic wobbles, demand for the all-important premium range could suffer.
Similarly, Tesco’s recent market share gains haven’t gone unnoticed by competitors, with threats of a new pricing war starting to emerge. Given its scale and financial resources, Tesco will most likely be resilient should this retail conflict emerge. However, in the short term, the group’s already tight profit margins will likely get squeezed, offsetting potential gains made through operational efficiency.
The point is, even with promising potential, Tesco shares could still fall short of current long-term expectations. Nevertheless, for investors seeking exposure to the retail sector, it could still be worth a closer look.
