Tesco: back in investors shopping baskets

Ed Monk

Ed Monk - Fidelity Personal Investing

Our Stock Watch series provides investors with what they need to know now about companies hitting the headlines. This time: Tesco

Tesco: back in investors shopping baskets

Why is Tesco in the news?

Still the nation’s largest supermarket by market share, Tesco has been fighting to turn around its fortunes after a difficult period. The past decade or more has seen its crown slip as it fends off competition from cheaper rival supermarkets like Aldi and Lidl, while also seeing market share slip to more premium stores.

A foreign excursion into the US market stumbled and investors have been waiting to see if it can refocus its effort back in the UK.

Tesco reported full-year profits this week and the headlines suggest those efforts are now bearing fruit. Full-year pre-tax profits were £1.7bn, with Tesco's same store sales up 1.7%.

Under the stewardship of Dave Lewis, the company said it had now met most of its targets in a turnaround plan, with the remainder set to be achieved in the year ahead. Shareholders were rewarded with a rise in the annual dividend.

Recent history

After a series of missteps, Tesco’s expansion plans appear to be paying off. Bookers, the wholesaler acquired last year for £4bn, is now adding to the bottom line and Jack’s - Tesco’s discount store spin-off - has now launched with eight stores. The company said there had been a ‘strong response’ to Jack’s and more openings are in the pipeline.

A potential threat from a proposed merger between Asda and Sainsbury’s - which would have created a group large enough to overtake Tesco in size - looks to have receded after competition watchdogs blocked the deal.

Tesco shares have enjoyed a strong year, with the Bookers deal, in particular, being welcomed by the market.

The case for

Dave Lewis can take great credit for the turnaround of the giant retailer. Perceptions of the Tesco brand in the minds of shoppers is improving and it may just have worked out a way to successfully counter those German discounters.

The dividend boost will add to the appeal for buy-and-hold investors.

The case against

While Tesco’s business is headed in the right direction, the shares now look expensive, at a price-to-earnings ratio above 22 times. Tesco’s fortunes are still substantially linked to the UK economy and growth in this domestic market looks uncertain.

The grocery market remains highly competitive and Tesco will never not face threats to its market share. The Asda-Sainsbury’s deal is dead for now but could return - or see Asda change hands to new owners who will have Tesco firmly in their sights.

More on Tesco

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