Tesco 'caps remarkable period' with profit beat and upgrade, say analysts

Tesco PLC shares rose 4% after the company reported first-half operating profit of £1.67 billion and adjusted EPS of 15.4 pence, both surpassing analyst expectations, despite sales missing consensus. This strong performance, alongside news of a potential tax break, prompted Tesco to upgrade its full-year group adjusted EBIT guidance to £2.9-3.1 billion, up from £2.7-3 billion, a move analysts anticipate will lead to a positive investor response given sustained market share momentum.

Analysis

Tesco PLC demonstrated strong first-half profitability, with operating profit reaching £1.67 billion and adjusted earnings per share at 15.4 pence, beating consensus estimates of £1.59 billion and 14.4 pence respectively. This performance, attributed by analysts to market share momentum, inflationary tailwinds, and favorable weather, prompted the company to upgrade its full-year group adjusted EBIT guidance to a range of £2.9-3.1 billion. The increase in the top end of the guidance was a positive surprise, as market participants, according to UBS commentary, had only anticipated a raise at the lower end. This positive outlook, however, is contrasted by first-half sales of £33.05 billion, which missed the consensus forecast of £35.91 billion, and an unchanged free cash flow guidance of £1.4-1.8 billion. An analyst from UBS noted that the upgraded guidance still implies a potential 4% EBIT decline in the second half, a scenario considered unlikely barring a significant intensification of competition from rivals such as Asda.

Key Decisions for Investors

• The upgraded full-year EBIT guidance, particularly the unexpected raise at the top end, signals strong operational momentum that may justify a bullish stance as it surpassed analyst expectations.
• Investors should monitor upcoming sales figures to determine if the first-half revenue miss indicates a persistent demand issue, and watch for any increase in competitive intensity, which was flagged as the primary risk to second-half profitability.
• Given that free cash flow guidance remained unchanged at £1.4-1.8 billion despite the profit upgrade, it is prudent to scrutinize future cash generation to ensure it aligns with the positive earnings outlook.