I Tesco (LSE:TSCO) share price fell 5% in early trading on Thursday (January 8). This was the market’s reaction to the company’s trading revival, which highlighted the slowdown in sales growth during the crucial Christmas period.
The group’s like-for-like sales rose 2.4% in the six weeks to 3 January, down from 3.1% in the third quarter and well below the 4.6% growth recorded in the second quarter.
UK retail sales growth also slowed to 3.2% over Christmas, although Tesco increased its market share to 29.4%, its highest level in more than a decade. Like-for-like sales growth for Q3 was 3.9%, compared to the 4.8% expected by analysts.
Analysts had hoped that Tesco would improve its guidance for the full year, and that did not happen. Instead, the company said full-year earnings may be higher than expected.
Oppression
There is another narrative here. Despite the bullish tone from management, the review also underlines how tight Tesco is. On the other hand, budget-conscious shoppers continue to trade down, lured by the ever-low prices at Aldi and Lidl.
On the other hand, high-net-worth customers are always selective, limiting how much a premium range like Finest can take away from the wider price pressure.
Tesco’s response has been to fight on both sides, expanding Aldi Price Match, releasing more than 3,000 everyday low price lines, and at the same time investing in its original label and fresh food.
That strategy has clearly secured market share, but it comes at a cost. Maintaining price competitiveness while maintaining margins is becoming increasingly difficult as competition intensifies.
Decline in Christmas-like sales growth suggests that even market leaders are not immune to consumer backlash.
Photo of measurement
I have been suggesting for several months that Tesco is trading very close to fair value. It is currently at 15.9 years forward, which puts it at the top of its peers.
Income growth is expected to be negative in FY2026 (-4.2%) before improving to 11.1% in FY2027.
It also carries a lot of debt. Total debt now sits at around £10.3bn, which is huge for a company with a market-cap of £28.9bn and relatively thin profit margins (a margin item is common in the industry).
Now, I certainly believe that Tesco deserves to trade lower than its peers. That’s because its size and market share give it cost efficiencies that can’t be matched across the industry. And it’s well-positioned to take advantage of when customers want to trade up – buy something with a little more flavor.
This should be on the basis of growth and net debt adjustment however.
So the valuation picture is very different. It’s not cheap, growth isn’t terribly impressive in the near term, and it carries a lot of debt.
However, he is the best player in the industry. And that can lead investors to think about long-term dynamics. Or think how Tesco will benefit if financially stretched Asda cuts operations.
Personally, I believe Tesco is still worth considering but there may be better options out there.
