The Tesco (LSE: TSCO) share price fell this morning, despite the company providing the market with an encouraging update on trading over its third quarter and the all-important Christmas period. What should investors make of this?
Record deliveries
Let’s look at the headline numbers first. Tesco recorded like-for-like sales growth of 6.7% for the six weeks to the end of January. This increased to 8.1% at Christmas. Importantly for investors, this performance was “market-leading for every week” of the festive period.
Predictably, the growth in online sales was particularly impressive, coming in at over 80%. This was the equivalent of £1bn extra in sales, according to the company. Orders have also “continued to grow” after December’s muted celebrations, leading Tesco to break records on the number of deliveries it’s making.
As to be expected, the company’s performance in the UK was all down to its food offer. A 14% rise in sales of Tesco’s ‘Finest’ range was perhaps inevitable. After all, many of us were unable to visit family and friends and needed cheering up over the festive period. There was also mention of strong sales of plant-based products. And toys, home and electrical product sales rose 4%.
Now, news of record Christmas trading across all channels, along with the possibility of a special dividend following the sale of its businesses in Thailand and Malaysia, would normally be lapped-up by investors. So, why have the shares fallen today?
Why is the Tesco share price down?
At least some of today’s reaction is probably down to the company maintaining its existing guidance for the current financial year. According to the FTSE 100 giant, retail operating profit is expected to be “at least as the same level as in 2019/20.“
Surprising? I don’t think so. Although bumper sales will help to offset the extra costs it has endured as a result of the coronavirus pandemic, it looks like any long-lasting impact from the former will prove muted. Due to more staff needing to be absent from work, Tesco now expects costs to increase to £810m. This is up almost 12% from its previous estimate. Tesco Bank will also make a loss of between £175m and £200m.
On top of this, it’s worth highlighting that Tesco’s performance in the UK hasn’t been replicated overseas. Like for like sales in Central Europe, for example, rose by less than 1% in Q3. A combination of curfews, trading bans and non-grocery shopping restrictions were blamed. According to the £23bn-cap, these had a “significant impact” on the number of people shopping in its large stores over Christmas.
Lastly, investors need to consider how the shares have performed in recent weeks. Even after taking today’s fall into account, the Tesco share price is still up 17% since the end of October. Sure, investors could have made a lot more money in other shares, but this is hardly a bad result for those buying at the lows. Some amount of profit-taking is to be expected.
Best of the best
Will Tesco’s share price shoot the lights out in 2021? It seems unlikely. Even so, today’s statement suggests to me it’s still the best UK supermarket to own. With its huge market share and improving dividend prospects, I’m inclined to agree with new CEO Ken Murphy that the company is in “great shape to keep delivering in 2021 and beyond.”
