Tesco share price dips on signs inflation is changing consumer habits

Tesco like-for-like sales beat forecasts

Tesco’s like-for-like sales grew 2.0% in the first quarter, coming in much stronger than the 0.9% pencilled-in by analysts.

Tesco: UK and ROI sales miss expectations

Sales in the UK and Republic of Ireland rose 1.5% and came in below the 1.8% forecast, but the supermarket continued to gain market share, having been the only member of the so-called Big Four to have successfully grown its slice of the pie over the past year and fend-off German discounters Aldi and Lidl.

Tesco: Central Europe and Booker beat forecasts

It was a significantly stronger performance from the other parts of the business that allowed it to beat forecasts. Like-for-likes in Central Europe jumped 9%, with analysts having only forecast a 3.3% rise, and wholesaler Booker saw sales soar 19.4% compared to the 8.9% pencilled-in by markets. Tesco said sales growth in Europe was driven by inflation across all its markets and noted that it also gained market share in all three countries in which it operates, while the double-digit growth at Booker was the result of a rebound in catering demand and continued growth in sales from retail customers.

Below is an outline of how Tesco’s like-for-like sales performed in the first quarter, which also highlights how sales are still running well ahead of pre-pandemic levels.

Tesco reiterates outlook despite challenging environment

Chief executive Ken Murphy warned that the environment remains ‘incredibly challenging’ as Tesco continues to focus on keeping prices low for consumers, which are becoming more cost-conscious. The company warned that it is starting to see ‘some early indications of changing customer behaviour’ due to inflation, although warned the shifts in habits seen last year when the pandemic was still a factor made it difficult to distinguish what is driving the change.

The supermarket’s scale and buying power should help it compete on price this year, having already warned profitability would be squeezed as it tries to keep costs down for consumers and continues to grapple with supply chain problems. ‘Inflation is a very real concern for everyone - customers, colleagues, suppliers - every part of our community,’ CEO Ken Murphy said on a call with media. ‘Where it is being passed on, our aim is to ensure it’s a little bit less and a little bit later than the rest of the market’.

That is likely to inject some uncertainty over the outlook, although Tesco reaffirmed its full year guidance. Tesco is aiming to deliver £2.4 billion to £2.6 billion of retail adjusted operating profit this year. That will be down from the £2.8 billion profit delivered in the last financial year but will remain above pre-pandemic levels. The supermarket’s retail free cashflow should be between £1.4 billion to £1.8 billion this year, also down from the unprecedented levels seen last year but higher than what was being delivered before the Covid-19 crisis started.

Where next for the TSCO share price?

Tesco shares are trading lower following the update this morning as markets grow cautious about how rising inflation will change customer behaviour this year.

Shares closed at their lowest level in 10 months at the start of this week of 246.1p and this is now a key floor for the stock. We saw the stock briefly test this level yesterday, but it swiftly rebounded as buyers re-entered the market. A slip below here opens the door to the 238p level of support seen back in January 2021. That could prove to be a more important downside target going forward as a break below here would bring sub-230p back into play for the first time since August 2021. The ultimate floor for the stock should be considered at 222p.

The RSI is firmly in bearish territory and trading volumes have continued to steadily rise, with the five-day average volume at time sitting over 50% higher than the 100-day average. This suggests the stock could come under more pressure going forward. The 200-day moving average is on the cusp on crossing above the 100-day average, and this could provide another bearish signal for the stock.

On the upside, Tesco shares need to recover back above the 260p mark before they can attempt a more significant jump higher toward the 50-day moving average at 265.6p and then the longer-term moving averages that are converging around the 275p mark. The 21 brokers that cover the stock believe Tesco can bounce back and hit fresh all-time highs of 314p over the next 12 months, implying it can rally from current levels.

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