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Why are Tesco’s shares down as profits soar?

Tesco share price: blue skies above a branch of Tesco, the UK's leading supermarket by market share.

Tesco shares are up by almost a fifth in the last year, but concerns over a cost of living squeeze are beginning to weigh on sentiment. With analysts expecting the company to report strong profits when it announces its preliminary full-year results on Wednesday, we look at the supermarket’s recent performance and the challenges that lie ahead. 

Tesco shares recover from last year’s dip

Over the past 12 months Tesco’s shares have risen more than 18%, rebounding after a share consolidation and £5bn payout to shareholders in February last year sent the stock tumbling to an almost four-year low. 

The shares reached a 52-week high of 304.10p during intraday trading on 28 January, but have since slipped back and are currently down around 6% year-to-date. This decline comes despite the chain’s strong recent performance. In January, Tesco’s Q3 and Christmas trading statement revealed a 2.6% year-on-year increase in group retail sales, prompting management to raise guidance. 

The company said it expected full-year retail operating profits, which were revised upwards at the half-year stage, to exceed the top end of the guided range of £2.5bn to £2.6bn. That compares to a figure of just under £1.99bn a year ago, and £2.33bn the year before that. So, with Tesco’s sales and profits on the up, why is the share price struggling this year?

Investors concerned over rising cost of living

The key factor behind the falling share price is the cost of living squeeze. Shoppers are dealing with high inflation – the UK’s consumer price index rose 6.2% in the year to February, the fastest pace in 30 years. But wage growth is not keeping up. This means that shoppers’ purchasing power is falling. 

The concern is that food price inflation may accelerate the shift away from the big four of Tesco, Sainsbury’s, Asda and Morrisons, towards discounters like Aldi and Lidl. In the 12 weeks to 20 March, Aldi and Lidl held a combined 15% share of the UK grocery market, up from 5% a decade ago. Tesco chair John Allan warned in February that the worst is yet to come on food price inflation, forecasting that it will hit 5% this year, up from 1% in Tesco in Q3.

However, fears that shoppers will desert Tesco may be overplayed. Market leader Tesco currently enjoys a 27.4% market share, which has remained relatively stable over the last year and is up from 26.8% two years ago. The rest of the big four have seen their market shares decline over the last two years, suggesting that it's from Sainsbury’s, Asda and Morrisons that the discounters are luring customers.

Thanks to its size and customer loyalty – the Clubcard scheme has more than 20m members in the UK – Tesco may be well placed to withstand inflationary pressures, able to keep its prices low in a bid to compete with Aldi and Lidl. 

What to look for in the results

In the upcoming full-year statement, the main areas to focus on are costs and the year-ahead outlook. The key challenges facing Tesco this year are likely to include the above-mentioned drop in disposable incomes, competition for staff, and the rising cost of doing business, from higher wages to soaring fuel costs. 

On shoppers spending less, Tesco is arguably big enough to keep prices relatively low and take the hit. Meanwhile, on staffing and costs, the picture appears mixed. The retailer has announced a 5.5% pay rise for its workers, bringing its hourly rate in line with competitors Sainsbury’s and Morrisons, but it will also cut 1,500 jobs as it rolls back night shifts.

The outlook for the year to the end of February 2023 is tough to call, but given the cost of living squeeze facing shoppers and the “growing cost pressures and supply chain challenges” for supermarkets that Tesco chief executive Ken Murphy identified in January’s Q3 statement, the retailer will have a fight on its hands to match this year’s expected sales and profit totals. It’s likely we’ll hear more on this when Tesco announces its full-year results at 7am on Wednesday 13 April. 

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