Tesco share price falls as rising costs weigh on outlook

Tesco earnings beat expectations

Tesco released full year earnings covering the 12 months to late February this morning, revealing that sales grew by 6% to £61.3 billion and that adjusted operating profit soared 58% to £2.8 billion. Adjusted diluted EPS jumped 89% to 21.86p. All three measures came in slightly ahead of forecasts.

The improvement in earnings was the result of higher sales, Covid-19 costs falling away and a return to profit for Tesco Bank, which had been sunk into the red when it was forced to book large provisions for potentially bad loans during the pandemic.

The performance prompted Tesco to raise its dividend for the full year by over 19% to 10.9 pence. Meanwhile, it has already returned £300 million through its current share buyback programme and Tesco recommitted to this plan this morning and said it will buy another £750 million worth of stock over the next 12 months.

Inflation is the big uncertainty lingering over Tesco

Inflation remains the key threat and Tesco has said profits from its core grocery business will stay flat this year in the best-case scenario or fall by over 9% if this starts to erode profitability. Retail adjusted operating profit rose 35% to £2.6 billion and Tesco said this will come in between £2.4 billion to £2.6 billion this year.

Retail free cashflow improved almost 70% during the year to £2.3 billion but Tesco said this will decline to a range of £1.4 billion to £1.8 billion this year.

Tesco said its outlook has targets with a wider range than it is used to, but blamed this on the ‘significant uncertainties in the external environment’.

Tesco said its performance this year will depend on the rate that shopping habits continue to normalise following the shifts seen during the pandemic, the pace of cost inflation and its ability to maintain its price position in the market.

It was revealed just this morning that UK inflation hit 7% in the year to March – marking its highest level in 30 years – as energy, fuel and food prices all continue to rise. With that in mind, pay packets only rose by 5.4% including bonuses in the three months to February, while regular pay was up just 4%. Ultimately, this means that consumers are facing a real terms pay cut as prices are rising at a significantly faster rate than wages, which will undoubtedly force more people to tighten their purse-strings going forward.

Consumers are becoming more cost-conscious as a result and Tesco’s scale, own-label products and its revived Clubcard Prices loyalty programme could all prove key in keeping prices down for customers, while its ownership of wholesaler Booker Group also provides another edge over its competitors. Tesco is the only ‘Big Four’ supermarket that is successfully competing with Aldi and Lidl, while rivals Sainsbury’s, Morrisons and Asda continue to cede market share to the German discounters.

‘Tesco is at its best when it puts customers first - it's what we did during the pandemic and it is what we will continue to do now.  Clearly, the external environment has become more challenging in recent months. Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check - working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs. Through our powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices, we are making more products more affordable, in more places than anyone else,’ said Tesco CEO Ken Murphy.

Where next for the Tesco share price?

Tesco shares fell as much as 5% in early trade this morning following the results, pushing shares to their lowest level in over six months.

The results have caused the stock to gap lower and the first downside target that can be treated as the initial floor for the stock is 254p, but any break below here could bring sub-248p into play.

Notably, shares have plunged below the 200-day sma for the first time in over nine months. Shares need to recapture 260p before eyeing the 2022-low of 264.4p. Above there, it can target the 200-day sma at 269.6p before aiming to reclaim the 50-day moving average at 282.7p and then the 100-day figure at 284.9p.

The RSI has experienced an extreme movement this morning and although it remains in bearish territory, it is on the verge of entering oversold territory. Shares have started to reverse and rebound when the RSI has slipped into oversold territory in the past, signalling it is near its bottom.

How to trade the Tesco share price

You can trade Tesco shares with City Index in just four easy steps:

1. Open a City Index account, or log-in if you’re already a customer.
2. Search for ‘Tesco’ in our award-winning platform
3. Choose your position and size, and your stop and limit levels
4. Place the trade

Or you can try out your trading strategy risk-free by signing up for our Demo Trading Account.