UK Supermarket Stocks Have Mixed 12 Months – Who Stands Out? (TSCO, SBRY, MKS)

Inflation has been rearing it's head a lot in recent years, and supermarkets and retailers have been feeling the pressure more than most, as central banks' fight stands against profit margins.

There has been a clear disconnect between UK retailers over the past year, and we have picked out three names that highlight the gulf. Tesco, Sainsbury, and Marks and Spencer might operate in the same space, but the reality is that markets have reacted quite differently to them over the last year, so there is little to be gathered from the sector on that point alone.

The Tesco share price (LON: TSCO) has added more than 15% over the last 12 months, showing strength against it's direct peer group. This impressive performance has set Tesco apart from other British retail giants such as Sainsbury, highlighting its robust position in the market amidst fluctuating economic conditions.

Over the same time-frame, Sainsbury's stock (LON: SBRY) has dropped by 4.45%, whilst at the higher priced end of the UK retail market, Marks and Spencer (LON: MKS) have added an impressive 59.32%.

Whilst the higher growth name of the three is clear, we are going to take a more conservative view, at the solid if unspectacular Tesco. A company that has delivered strength, dividends, and hovers above the psychologically important price level of 300p in the lead up to the AGM on 14th June.

Tesco's financial metrics reflect the strength behind its share price rally. In the past year, the company has witnessed its sales excluding VAT and fuel rise from £57.2 billion to £61.47 billion. Moreover, Tesco's adjusted operating profit experienced a rise, moving from £2.5 billion to £2.8 billion, underscoring the company's effective cost-management strategies and its ability to grow its bottom line.

A pivotal move in Tesco's recent history was the divestiture of its banking business. The segment, which generated an operating profit of £69 million, was sold to Barclays in a transaction valued at approximately £1 billion. The sale of Tesco Bank has not only streamlined Tesco's operations but also provided a substantial return of capital to its shareholders. This includes a sizable £250 million special dividend originating from Tesco Bank, with plans to distribute the majority of the proceeds from the Barclays deal to the shareholders.

Looking ahead, Tesco projects that its operating profit will maintain its current level at £2.8 billion for the financial year. Additionally, the company anticipates its retail free cash flow to be in the range of £1.4 billion to £1.8 billion, providing further evidence of the company's solid financial health and operational efficiency.

Despite some investor concerns regarding potential overvaluation, a Discounted Cash Flow (DCF) calculation suggests that Tesco's valuation remains reasonable. In fact, the stock is currently trading at a 325 discount to its fair value, indicating that there may still be an opportunity for investment at a price considered fair by market standards.