Tesco shares rise on relief after better than feared sales

Updated at 1300 BST

 

Tesco has released almost the best Q1 results investors could have hoped for.

On one level, there’s certainly room for surprise and a few red faces among City analysts on Friday, many of whom had expected Tesco’s key UK like-for-like sales to tank by an additional 2%-3%.

On the other hand, with signs of inroads by Tesco’s turnaround CEO, Dave Lewis, already evident from final results—a forecast-beating £1.4bn trading profit, and sales breaking into the black in the spring—sales risks were arguably on the upside.

Even taking into account customary provisos that have become necessary whilst judging the performance of the UK’s precarious retailing industry, chiefly that what counts as progress has become relative and marginal,  Tesco still managed to maintain its rate of retail sales at the same level as the year before—in fact slightly better.

The share price reaction has been swift and sustained as the first hour of Friday’s session draws to a close, with Tesco stock maintaining a lead of more than 3%.

Morrisons and Sainsbury’s shares are also being lifted in the wake of their bigger rival.

 

 

Blind scepticism

Specifically, in Tesco’s case, its excellent ‘expectations management’ combined with ruthless progress on the turnaround front have produced sales results which ought not to have been a big surprise for investors, but have turned out to be just that, due to the pessimistic tilt of market forecasts.

I noticed that market forecasts remained stubbornly sceptical about the supermarket’s progress during the spring months, even though Tesco achieved absolute, albeit marginal sales growth in a 24-week stretch between early November and late March.

The subsequent relapse of sales between then and May can largely be put down to execution of planned store closures.

That’s the ‘ruthless’ bit.

Had Tesco’s store exit programme been less aggressive, a few further basis points of sales growth may have been up for grabs.

But Tesco’s Dave Lewis, has decided there can be no deviation from the plans he set in motion last year.

 

 

The ‘right kind’ of goodwill

This means that even though Tesco’s volumes and transactions look set to keep showing real-terms improvement, after 1.4% and 1.3% respectively in Q1, like-for-like sales comparisons will continue to be skewed by the elimination of selling space—perhaps for several more months.

Once again, this seems to be the kind of strictly regulated progress that CEO Lewis is after.

So long as Tesco’s retail metrics keep trending in the direction that his strategy dictates, it’s likely he’ll have a good deal of goodwill in his back pocket to fend off  potentially tetchy long-term investors, of the kind he may face later today at the AGM.

The odd relative ‘surprise’ on the upside, of the like we’ve seen this morning, will also help.

The group’s Annual General Meeting kicked off in central London as this article was being updated late in the morning.

As far as I can tell, there are no resolutions to vote on that could turn out to be more fractious than management have planned for.

Even so, some investors may still take the opportunity to vent their ire over Tesco’s abysmal 2014—despite the fact that few executives in place then are still around.

More constructively, there may be scope for some hints about Tesco’s asset disposal plans, especially given that the Q1 statement was bereft of any further update.

 

 

Not so fast

In theory, today’s likely benign AGM should mean Tesco’s stock price rally on the back of better-than-expected sales has legs.

Even so, I still regard current Tesco share price technicals as challenging.

The stock is now touching a falling trend line from April, and close to a couple of moving averages.

At the same time a stochastic indicator (bottom sub-chart) does not imply a great deal of room left on the upside under normal circumstances.

At most, Tesco shares may extend their current rally towards or a little beyond 230p where the key 100 and 200-day moving average are close to converging.

But I’d see such levels as the stock’s current limit for the medium term.

 

 

 

 

 

Short-term trading of City Index’s Tesco Daily Funded Trade shows a relatively relaxed picture, after the sharp gain of more than 3% early in the session.

A rising trend from last week will help protect most of the gains since then, in the event that the DFT begins to move definitively lower.

But the upward momentum trend is waning more obviously in this time frame (see blue ellipses and white arrow on the sub-charts).

There will be no confirmed ‘cross’ right now, strictly speaking, from the Slow Stochastic Oscillator system (bottom) since the indicator’s moving average lines are not above the nominal overbought ’80′level.

But any sort of unwinding of the positive sentiment will bring the DFT back to the gap formed this morning when it and the underlying stock catapulted between about 218 to 221.

All gaps are inherently risky.