Key points:
- Tesco will report interim results Wednesday, October 5
- Will inflation and the cost of living crisis have a big impact on its results
- The supermarket chain is also competing with the rise of discount supermarkets Aldi and Lidl
Tesco (LON: TSCO), the UK's biggest supermarket, will report interim results on Wednesday for the six months ended August.
Ahead of the release, there is a question as to whether the supermarket giant, which also has business in banking services, fuel and mobile phone contracts, has been able to contend with the growth of discount retailers such as Lidl and Aldi during the cost of living crisis.
It's not only inflation in the UK that could impact Tesco (although it is a significant portion of its business). The company also has stores in some European countries as well.
Analyst consensus expectations see Tesco reporting a rise in sales but a decline in adjusted retail operating profit and adjusted pre-tax profit as the current economic conditions weigh on its margin. In the first quarter, Tesco's like-for-like sales rose 2%.
In early September, Jefferies analyst James Grzinic downgraded Tesco to Hold from Buy, cutting the firm's price target on the stock to 260p from 350p. Grzinic told investors in a memo that he sees “tremendous upcoming pressures” on consumers resulting in the short-term being tough for UK retailers. The analyst also stated that discretionary spending could decline significantly in 2023 and 2024.
Given the current economic environment, prices are a significant focus, and the rise of discount supermarkets Aldi and Lidl provides a substantial challenge to Tesco, with customers considering switching. However, the UK's largest supermarket chain said back in April that it is in its “strongest UK price position in six years.” In addition, Tesco's Aldi Price Match pledge increased to around 650 lines.
Despite a rise over the last few days (up over 1% Tuesday), Tesco shares are down over 27% in 2022, hitting post-pandemic lows.
Even so, according to TipRanks, out of 8 analysts polled, six rate Tesco as a Buy, with two giving the stock a Hold rating. In addition, the average price target is 300.14p, representing a potential 41% upside.
Nevertheless, expectations for Tesco's earnings numbers are somewhat modest.
