Stock Watch

Tesco share price rises on positive outlook

CMC Markets

The Tesco share price is higher even though first half operating profit before exceptional items fell by 15.6% to £1.037bn. 

The retailer stated that uncertainties exist because of the pandemic but it still anticipates that full-year retail operating profit will be the same as last year’s level. Group sales increased by 6.6% to £26.7bn. UK like-for-like (LFL) sales in the six-month period rose by 7.6%. Costs connected to Covid-19 for the UK business were £53m. Tesco also said that the rise in volumes in the UK and Ireland as well as the business rates relief offset the pandemic-related expenses. The banking arm underperformed as the operating loss was £155m. 

Tesco share price rises as sales grow

The pandemic had its pros and its cons for Tesco – a common theme for retailers. The company posted an 8.7% rise in first quarter underlying LFL UK sales, while group LFL sales rose by 7.9%. Costs jumped on account of the health crisis and the company cautioned that expenses because of the pandemic would likely to be at the upper end of the prediction, £650-£925m.

Tesco had to increase provisions for bad debts at the bank division, with respect to unemployment levels and GDP forecasts. The banking unit is tipped to register an annual loss of between £175m and £200m, but its liquidity ratios are healthy.

Work to do for new CEO

Recently, Ken Murphy took over from Dave Lewis as CEO. Mr Murphy has big shoes to fill as Dave Lewis joined the retailer in 2014 and was crucial to the turnaround plan. Tesco had a string of profit warning prior to the arrival of Mr Lewis, who oversaw a big restructuring scheme – office jobs were cut, the loan book of the banking division was sold-off for £3.8bn and more recently its supermarket units in Thailand and Malaysia were spun-off. In June, Tesco announced plans to sell of Polish division too. This is a part of a wider strategy to focus on the UK and Ireland business.    

Bearish trend set to continue for Tesco share price?

Broadly speaking, the Tesco share price has been in a downtrend since February. The lows that were hit in March – on the back of the pandemic-related sell off – were the lowest since January 2019. The stock enjoyed a rebound in May but then when wider bearish trend set-in again. Last week, the Tesco share price fell to its lowest level since April. If the bearish move continues it could target 200p, but a rebound might encounter resistance at 220.9p, the 50-day moving average.