Shares in the UK’s biggest grocery chain Tesco (TSCO) dropped 2.3% to 226p as the firm’s cautious outlook for the year outweighed a positive first quarter trading update.

Total retail sales for the three months to the end of May were up 1%, compared with forecasts of a small decline, thanks to continued growth in online sales and a recovery at Booker following the reopening of the hospitality sector.

However, with nine months of the financial year still to go, the firm stuck to its guidance that earnings would be in line with 2019/20, which disappointed some analysts.

Chief executive Ken Murphy said he was pleased with the strong start to the year but, given the uncertainty over new virus variants, the possibility of more restrictions and the lack of visibility in the at-home dining market, felt no need to change April’s guidance.

PLENTY OF POSITIVES

Still, there was much to like about the quarterly update. Online sales grew 22% on last year and were up 82% on pre-pandemic levels with 1.3 million orders per week.

Baskets sizes were steady, while customers who migrated to online last year were more likely to continue shopping online and were ordering more frequently, resulting in a rise in Tesco’s market share.

The West Bromwich fulfilment centre is now at full capacity and the Lakeside facility is seeing increased order flow, so a third centre is in the works. Subject to demand, the firm could open more centres in the second half of the year.

Sales of clothing and general merchandise were up sharply on a year ago as customers geared up for the summer, and sales to the foodservice sector jumped by more than two thirds as pubs, bars and restaurants opened their doors from April onwards.

However, as today’s data from the Office for National Statistics showed, grocery sales declined between April and May as more people opted to eat out rather than cook at home, justifying the firm’s caution for the full year.

CHEAP COMPOUNDER

Clive Black, retail guru and director of research at Shore Capital, says the update was ‘sound and consistent with our full year earnings expectations’, meaning there is no need to adjust his forecasts.

‘A frankly dull stock in recent times, (Tesco) is unlikely to offer a notable catalyst for rapid share price appreciation in terms of near-term upward earnings momentum, albeit we continue to see a free cash flow yield of 8%+ (with most of that resource going to shareholders in one form or another) as representing good value’, he concludes.

Analysts at Bank of America took a more downbeat view. ‘Despite a better than expected Q1 start, we retain a cautious stance as we believe the valuation is still quite demanding compared with the European average, with no evidence so far that Tesco would end up in a stronger position than pre-pandemic’, they observed.

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Issue Date: 18 Jun 2021