The Tesco share price has had a fairly decent year so far, though its share price has pretty much gone sideways since May, as the supermarket sector continues to be squeezed from the bottom up by Aldi and Lidl. Despite rallies in June and August, the Tesco share price failed to push above 242p in either instance.
Tesco share price faces pressure from discounters
Under pressure from the discounters, Tesco has taken steps to underpin its balance sheet in recent months and focus on its core operations of food, retail and wholesale. This underpinning has seen the company spin off its mortgage business to Lloyds Banking Group for £3.8bn, and in doing so has helped it outperform its rivals Sainsbury’s, Morrisons and Asda.
Tesco said it would use the proceeds of the sale to reinvest in its remaining businesses, and remain competitive in terms of its costs.
There has also been speculation that Tesco might sell its Polish division, given that last year the unit posted a loss of £11m. We’ve also seen the first Jack’s store get rebranded back into the Tesco brand, perhaps in recognition that the move into a different brand may have been a mistake.
Tesco continues to lose its market share
If a recent Kantar survey is any guide, Tesco is not finding the retail market to its liking, given that we saw a decline in overall sales of 1.4%. There were some bright spots from sales of free-from products, which saw an 11% rise, as well as improvements in its own value lines, while volume sales saw a rise of 0.9% from a year ago.
These numbers don’t disguise the fact that Lidl saw its market share hit a record high, moving above 6% for the first time, putting it just behind Aldi, which is now at 6.3%.
Back in June, the Tesco market share was at 27.3%, down from 27.7% in June 2018. This market share continues to see significant erosion, given that according to the most recent Kantar data we are now below 27%, a far cry from a few years ago when Tesco was flirting with the 30% level.
What could the H1 numbers mean for the Tesco share price?
This week’s numbers are likely to be of particularly interest, especially with regards to operating margins, which are likely to continue to come under pressure. At the most recent set of numbers they were at 3.4%, and could well fall further to 3.1%, in the face of the company’s “100 years of value” campaign. While this has boosted sales, it has resulted in margins getting squeezed, as they look to fend off the discounters, as well as concerns about Brexit. The company has also been cutting costs, this year alone has seen over 13,000 jobs disappear.
Last year the company made £2.2bn in operating profits on revenues of nearly £64bn, and currently expects to see revenues grow to £64.7bn for this fiscal year.
Expectations for the first half of this year are for £1.33bn in terms of operating profits, of which £999m of that would be for UK and Ireland, which should keep it on course for market expectations of total operating income for this year of £2.7bn.
The company’s half-year results are out at 7am on Wednesday, and investors will be keeping a close eye on any impact they have on the Tesco share price.
Read our Tesco share price half-year results round-up.
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