Can Tesco Shares (TSCO) Continue To Outperform UK Markets in 2025?

Tesco shares (LON: TSCO) have delivered up an impressive year for holders, with a gain of 24.9% through 2024 a significant outperformance to the broader UK market. The FTSE 100 gained a little over 5% on the year, making TSCO almost a 5x pick, but can this trend continue into 2025?

One analyst see's the FTSE reaching 8,800 next year, which would itself reflect an 8.3% gain from current levels, so a beat of 2024 proportions may be over-optimistic. Tesco could again outperform, yet the magnitude of any potential beat (should one occur) will likely be narrower.

Operationally, Tesco is not standing still, and has effectively leveraged its product offerings to compete with upmarket rivals like Waitrose by utilising its Finest range and implementing competitive pricing strategies with Aldi and Lidl. Furthermore, the company's Clubcard loyalty scheme has been recognized by a competition regulator for providing authentic savings to customers.

Tesco currently holds a significant market share of 28.1% in the grocery market, notably ahead of its closest competitor, Sainsbury's, which has a 15.9% share. In financial terms, Tesco is projected to witness an 8% rise in its earnings per share, a strong indicator of growth.

One major strategic move includes the sale of its banking operation to Barclays (LON: BARC), allowing Tesco to concentrate more intensely on its core retail business. This decision prompted Barclays to increase its price target for Tesco shares to 415p.

The second half of 2024 has delivered the large bulk of growth in Tesco's stock price, with the 19% gain since the end of June almost three quarters of the annual increase. A slowing in the final month of the year has potentially allowed some time for pause.

Accumulation up and around 370p could prove to be a healthy step before a breakout above 375p, with 340p the next support down should current price action falter. The forecasted dividend yield stands at 3.6%, promising a reasonable return for shareholders.

Analysts remain largely bullish on TSCO, with the consensus target some 10% up from current levels. In the past month, JP Morgan (410p) and Morgan Stanley (427p) have both upgraded the stock, whilst RBC Capital (375p) and Exane BNP Paribas (445p) have initiated coverage with healthy price targets.

Potential challenges may loom, such as the anticipated increase in National Insurance contributions from April 2025, affecting one of the UK's largest employers due to changes in the Chancellor's Budget.

Tesco's strong market position, strategic initiatives, and robust financial forecasts suggest a promising outlook for 2025. Nonetheless, external economic factors and policy changes require careful consideration as they could impact the stock's trajectory.