News

Will the pandemic boost Tesco’s share price?

CMC Markets

Despite Tesco’s share price having declined around 8% from levels at the end of December 2019, the shares still remain higher than at the beginning of the year. In fact, the UK’s biggest supermarket was one of those rare beasts last year – a food retailer with a decent share price performance.

Tesco outperforms rivals

The company had a robust Christmas trading period, as sales grew 0.1% for the six weeks to 4 January – the fifth successive annual rise. On a quarterly basis, the numbers weren’t quite so impressive, but it was still able to outperform its peers Morrisons, Sainsbury’s and Waitrose.

Tesco and its rivals ought to reap the benefits from the sudden drastic changes in consumer behaviour as a result of coronavirus, and the ensuing shutdowns and lockdowns. However the bout of panic buying has subsided somewhat over a combination of media coverage and supermarket restrictions, and so sales could return to something a bit more like a normalised level – particularly as some cupboards will be rather well stocked with toilet rolls, tea bags, tins of soup and other essential items.

Shareholder payouts under scrutiny

Tesco has taken further steps to bolster its balance sheet, announcing the disposal of its Thailand and Malaysia businesses, with $5bn set to be paid out to shareholders.

However, this could be scaled back given the current challenges facing all retailers, with management yet to make a final announcement. The optics of paying out money to shareholders when the retail sector is receiving wholesale tax breaks may not be particularly well received, and rival Morrisons recently cancelled its special dividend.

Supermarket demand likely to remain high

Dividend payouts notwithstanding, Tesco and its peers are also likely to be one of the primary beneficiaries of the current coronavirus uncertainty. This is due not only to the surge of stockpiling it seems that many consumers embarked on as the crisis began to escalate, and fears of food shortages grew, but also the wholesale suspension of business rates for a sector that has struggled immensely over the last five years.

Over the coming months, supermarkets are almost certainly going to be one the very few places consumers are able to actually visit and shop in person – notwithstanding the long wait for online deliveries as supermarkets struggle to keep up with demand. All restaurants, cafes and pubs are shut for punters (save takeaway options for some), and a huge amount of consumers’ cash which would have been spent at such establishments, is instead very likely to be directed towards the supermarket aisles.

Indeed, demand at supermarkets in general is expected to remain high as long as the lockdown lasts – in marked contrast to a sector that has witnessed minimal sales growth and increased competition from the likes of German upstarts Lidl and Aldi.

Where next for Tesco’s share price?

Tesco’s [TSCO] share price has actually fallen as much as 14% since the coronavirus outbreak, in contrast to its competitors who have managed to eke out small gains. However, given the increased demand, Tesco shares may start to gain some traction. Tesco is currently desperately trying to recruit 20,000 temporary staff for a minimum of 12 weeks, in an unprecedented hiring spree to help replenish empty shelves and deliver more online orders.

Look out for Tesco’s preliminary results for its 2019-20 financial year, which are due for release at 7am on Wednesday 8 April, 2020.

 


Sign up for market update emails