UK supermarket Tesco (TSCO) reveals strong third quarter performance, but fails to hit market expectations.

As a result, its shares are being punished by the market and are down 4.8% to 201.7p. Notably its main rivals Morrisons (MRW) and Sainsbury's (SBRY) both reported better-than-expected numbers this week on Tuesday and Wednesday respectively.

SUPPLY ISSUES DRAG ON TRADING

In the UK and Ireland, like-for-like sales are up 2.3% in the 19 weeks to 6 January as lost tobacco sales held back further growth. Supply issues emerged after wholesaler Palmer & Harvey fell into administration last year.

Shore Capital analyst Clive Black says tobacco sales took 0.5% off UK and Ireland like-for-like sales over six weeks.

An ongoing decline from general merchandise was another sore point, falling 0.6% over the Christmas period.

Overall, trading at Tesco looks solid with sales up 0.6%, driven by strong like-for-like revenues and volumes, particularly for fresh food.

The supermarket says its efforts to pass on less inflation to its consumers compared to rivals could be behind its sales performance.

BOOKER TAKEOVER TO DELIVER BENEFITS

Black believes the best is yet to come for Tesco, arguing its takeover of Booker (BOK) should enhance the supermarket’s free cash generation from 2019.

He also believes the free cash generation should reduce debt and boost the group’s ability to pay dividends.


Issue Date: 11 Jan 2018