Tesco (LSE:TSCO) shares have been on something of a rampage these last few years. While the cost-of-living crisis has proven to be a powerful boon to discount retailers like Adli and Lidl, Tesco’s also successfully reaping benefits. That’s because management’s decision to expand its premium Tesco’s Finest product line created a new home for shoppers who previously went to higher-end stores such as Waitrose.
At the same time, its Clubcard price-matching scheme has also proven effective at attracting shoppers through the door. So it’s no wonder the stock’s up almost 65% since January 2023. That means investors who bought £5,000 worth of shares almost two years ago are now sitting on an investment worth £8,250.
By comparison, the same investment into a FTSE 100 index tracker over the same period would only have reached £5,740. Clearly, Tesco shares have outperformed. But now the question is, can it continue to do so in 2025?
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Where’s the Tesco share price going?
Following the favourable conclusion of the Competition and Markets Authority’s investigation into grocery loyalty pricing schemes, Tesco’s seemingly free to continue its Clubcard-driven strategy. As such, the firm’s recent expansion of market share looks set to continue moving forward. Even more so now that management’s disposed of its banking division, allowing all focus to be allocated to its core retail operations.
Given the size of Tesco’s business, revenue growth isn’t likely to start surging anytime soon. However, the expected increase in product volumes is still likely to generate some small growth moving forward. And with its premium product line offering higher margins, earnings are similarly expected to rise in 2025 at a slightly faster pace.
Combining all these factors, analysts have forecast that the Tesco share price could land anywhere between 365p and 445p by this time next year. Given that the shares are already trading towards the lower end of this spectrum, it suggests limited downside for investors considering adding this business to their portfolios.
What could go wrong?
Forecasts aren’t set in stone, nor do they provide guarantees. As economic conditions improve, premium shoppers may decide to revert back to their previous shopping destinations. And if this behaviour becomes widespread, Tesco may be left with a lot of perishable inventory that’s no longer flying off the shelves.
In the meantime, if discount retailers are able to continue cutting prices, the firm’s profit margins could come under intense pressure as it continues to price match for the remainder of its customer base. But even if this doesn’t happen, there’s the incoming increase to the UK’s living wage to consider.
Today, the supermarket chain has over 330,000 workers in its employment, a large portion of them earning the living wage. As such, Tesco’s staff expenses are expected to rise considerably. Needless to say, that’s bad news for the group’s bottom line.
Nevertheless, with a price-to-earnings ratio sitting at just under 14, the valuation’s far from overpriced, given the performance management’s currently delivering. That’s why I think it’s a business that deserves a closer look from investors today.
