Have Tesco shares got their mojo back?

Good leadership and great recents have driven Tesco plc (LON:TSCO)’s share price, but competition from discounters remains a thorny issue.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Tesco (LSE:TSCO), the UK’s biggest supermarket chain, are up more than 25% from last December’s lows at the time of writing, outperforming the FTSE 100, which is up 10% over the same period. Shareholders must be feeling pretty good about that. What has driven this extraordinary growth, and could there be more on the cards?

Good leadership has rebuilt confidence

CEO Dave Lewis has done tremendous work to restore investor faith in the supermarket chain. Taking over in 2014 following an accounting scandal in which Tesco overstated its annual profit by £250 million, Lewis has cleaned up the mess created by the previous administration and made some much-needed changes. In particular, the new regime has cut costs and scaled back some of the supermarket’s more ambitious overseas expansion moves. 

Recent results have been great

Having recently announced preliminary annual results, Tesco reported an annual profit increase of 28%. Same-store sales were up 1.7% for Tesco itself, and up 2.9% overall when factoring in the results from wholesaler Booker, which was acquired in early 2018.

Strong operating results allowed management to increase the dividend to 5.77p/share, up from 3p/share. This prompted Lewis to say: “After four years we have met, or are about to meet, the vast majority of our turnaround goals. I’m very confident that we will complete the journey in 2019/2020”. Moreover, Tesco’s strong cash generation could mean that the company will be able to return more money to shareholders via further dividend increases or stock buybacks.

Competition remains a problem

However, there may be clouds on the horizon. Competition from low-cost retailers like Aldi and Lidl continues to pose a problem. This will become particularly acute if the broader economy takes a turn for the worse. After all, it was during the previous recession that the German discounters were able to massively expand their market share. Currently, they collectively control 13.6% of the UK supermarket market, more than Morrisons, and within striking distance of Sainsbury’s and Asda.

Tesco has had to respond to this threat by cutting prices at its stores, and absorbing that cost by making savings in operating costs and shipping. Despite price cuts, operating margins have risen every year since Lewis took over (1.7% in 2015, 1.8% in 2016, 2.3% in 2017 and 2.9% in 2018).

It hasn’t all been defence, either. In 2018, Tesco launched Jack’s, its own discount store chain. Although this is still in many ways a pilot programme (there are only 9 locations so far), management seems happy with the experiment, and has said that it plans to expand the chain. While Tesco does run the risk of Jack’s siphoning customers away from its main brand, it does seem to at least be better-prepared to deal with the discounter threat than its Big 4 rivals.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stepan has no position in any company mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »