The Tesco (LSE:TSCO) share price has been on fire since 2024. Despite the fiercely competitive landscape, the UK’s largest grocery retailer has seen its valuation climb more than 30% over the last 12 months. As a result, the stock price is seemingly on track to hit £4 for the first time since 2011.
Looking at the latest results, it isn’t hard to see why investors are excited. Better-than-expected profits have enabled management to raise its full-year outlook as well as reward loyal shareholders with a 10% dividend hike. But can Tesco maintain this momentum moving forward? And if it does, how long will it take before shares once again trade at £4 for the first time in over a decade?
Defending against the competition
When inflation started surging through the roof, Tesco was in a bit of a pickle. While it certainly isn’t the most expensive place to do the weekly shopping, it’s hardly the cheapest. And discount retailers such as Aldi and Lidl have been capitalising on this to drive more footfall.
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However, it seems management’s tactics to defend its market share have worked quite well. The bonuses of joining Tesco’s clubcard loyalty scheme paired with its price-matching scheme seem to have sucessfully retained a significant chunk of its existing customers.
At the same time, investments into ramping up Tesco’s Finest range of premium products have created a home for new customers who typically do their shopping at its more premium rivals such as Waitrose and Marks and Spencer. In fact, product volumes from this segment grew by an impressive 14.9% across the six months leading up to August this year.
This more favourable product mix translated into a significant expansion of underlying profit margins. While they’re still not the highest in the industry, even a small improvement in profitability can make an enormous difference, given the sheer volume of goods that Tesco sells each year.
The journey to £4 each
With better-than-expected results, it’s not surprising to see City analysts review their 12-month price targets for this FTSE 100 stock. As usual, there’s a broad range of opinions. However, the average consensus is that the Tesco share price is on track to reach just shy of the £4 threshold, at 396.5p, by this time next year.
Is that realistic? Well, if management can maintain the momentum and continue to deliver impressive results, it would certainly seem plausible. Even more so, given the group’s current price-to-earnings ratio, it looks fairly reasonable. And with its credit card and loans segment being sold off to Barclays, the group’s credit risk exposure has also fallen – an encouraging sign.
However, the retailer’s future success is far from guaranteed. The firm’s significant pile of debt does pose a concern. However, a more immediate threat is an upcoming report from the Competition and Markets Authority relating to loyal pricing schemes across the entire retail sector.
Tesco isn’t the only business affected by an adverse outcome from this report. However, given its heavy reliance on its Clubcard loyalty scheme to attract and retain customers, regulatory interference may prove to be a significant speed bump on the journey towards £4 a share.
