n August, Tesco
chairman John Allan warned BBC Radio 4 that the supermarket was “very short of drivers”. “It’s a combination of many EU drivers having decided to go home and also the ageing age profile.”
Analysis of the ONS Labour Force Survey for the three months to the end of June for Logistics UK shows 14,000 EU HGV drivers left the UK in the year to June 2020, and only 600 returned over the following 12 months. As of the end of July this year, the HGV driver shortage stood at 100,000, according to the Road Haulage Association.
To plug the gap and to avoid an empty shelves crisis, HGV driver wages have surged. But how much of an impact will the situation have on the Tesco share price and the company’s bottom line, if any?
Tesco share price rises on return to cash
In the year-to-date, the Tesco share price is up 6.9% at 254.45p as of 20 September – and is up 14.4% in the last 52-weeks. Much of the muted growth in the Tesco share price can be attributed to the supermarket selling off its businesses in Malaysia and Thailand for $10.6bn. The rollback of its international expansion helped it pay out £5bn to shareholders via a special dividend, and make a £2.5bn contribution to its pension scheme.
The Tesco share price is also up 4.3% in the past month, suggesting investors aren’t too worried about Christmas being cancelled. Even Allan stressed to BBC Radio 4 listeners that the situation shouldn’t be exaggerated.
“At the moment, we’re running very hard just to keep on top of the existing demand, and there isn’t the capacity to build stocks that we’d like to see … in that sense, I think there may be some shortages at Christmas,” said Allan. “But I wouldn’t want to overdramatise the extent to which that would be the case, I think it’s very easy to make a drama out of a modest crisis.”
A case of the overblown?
The proof will be in the pudding. Tesco reports its interim results on 6 October, and though the current situation is unlikely to be reflected in the second-quarter financials, the supermarket should give an indication as to how it might affect sales over the festive period and during the third quarter in particular.
Operating profits for fiscal 2021 fell 28.3% year-over-year to £1.8bn, as Covid-19 led to higher payroll and health and safety costs. Free cashflow fell 29.8% year-on-year to £1.2bn. But sales increased 7% to £53.4bn, and the supermarket left its dividend unchanged from 2019-2020 at 9.15p. This suggests it’s confident of a quick recovery.
The company stated in its fiscal year 2021 results that operating profits should return to pre-pandemic levels in 2022. Yet, even if the HGV driver and food shortages end up leading to a drop in year-on-year sales and unexpected operating costs being incurred, this might not dampen the outlook.
In reaction to April’s fiscal year 2021 results, analysts at Hargreaves Lansdown wrote: “Even if profit growth remains unexceptional, Tesco could be interesting to a certain type of investor. A reinforced balance sheet and a prospective dividend yield of 4.7% that’s well covered by free cash could be of interest for income-seeking portfolios.”
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