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1. Company Snapshot

1.a. Company Description

Tesco PLC, together with its subsidiaries, engages in retailing and retail banking activities.It provides food products through approximately 4,752 stores in the United Kingdom, Republic of Ireland, the Czech Republic, Slovakia, and Hungary, as well as through online.The company is also involved in the food and drink wholesaling activities.


In addition, it offers banking and insurance services in the United Kingdom.Further, the company operates a network of one stop convenience stores; and provides data science, technology, software, and consultancy services.Tesco PLC was founded in 1919 and is headquartered in Welwyn Garden City, the United Kingdom.

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1.b. Last Insights on TSCO

Tesco's recent performance has been driven by a strong first half, with UK like-for-like sales up 4.9%. The company's strategy of matching prices with discounter Aldi on over 600 items and promoting its Clubcard loyalty scheme has driven growth. Tesco raised its full-year profit forecast, expecting adjusted operating profit of $3.9-$4.2 billion. The company also announced a dividend of £0.048. Analysts have upgraded their price targets, with J.P. Morgan raising its target to 450p. Institutional shareholders, owning 81% of the company, may influence the stock price.

1.c. Company Highlights

2. Tesco's Strong H1 Results Driven by Customer Satisfaction and Market Share Gains

Tesco's group sales grew 5.1% with growth in all operating segments, and adjusted operating profit increased by 1.6%. The company's headline earnings per share increased 6.8% year-on-year to 15.43p, beating analyst estimates of 14.27p. The actual EPS came out at 0.1549, relative to estimates at 0.1427, indicating a positive surprise. Tesco's cash delivery was strong, with GBP 1.3 billion of free cash flow in the half, and an interim dividend of 4.8p per ordinary share was proposed.

Publication Date: Oct -24

📋 Highlights
  • Group Sales & Profit Growth:: Tesco's group sales grew 5.1% with adjusted operating profit up 1.6% year-on-year.
  • UK Market Share Expansion:: Achieved over 28% market share in the UK, gaining share for more than 2 years.
  • Finest Range Performance:: Double-digit growth in Finest sales, up 16% year-on-year.
  • Strong Free Cash Flow:: Generated £1.3 billion in free cash flow, while net debt increased to £9.88 billion.
  • Upgraded Profit Guidance:: Raised full-year adjusted operating profit guidance to £2.9 billion–£3.1 billion.

Segmental Performance

Tesco's UK and Ireland segment delivered total sales growth of 5.6%, while Booker total sales increased by 2.4%. Central Europe sales grew by 5% with growth across all countries. The company's investments in price, quality, and online capabilities have helped it gain market share, particularly in the UK where it has grown volume and gained market share for over 2 years.

Operational Highlights

Tesco has improved and expanded its store estate, opening 38 new stores and refreshing 112. The company has also invested in its distribution network, opening a new semi-automated fresh food distribution center in Aylesford and announcing a major investment in a new site at DP World London Gateway, expected to open in 2029. Online performance remains strong, with growth in market share and customer satisfaction, driven by the rapid delivery service, Whoosh, which continues to grow at a double-digit rate.

Valuation and Outlook

With a P/E Ratio of 19.07 and a Dividend Yield of 3.13%, Tesco's valuation appears reasonable. The company's ROE of 13.99% and ROIC of 7.13% indicate a strong ability to generate returns on equity and invested capital. Analysts estimate next year's revenue growth at 3.7%, which suggests a positive outlook for the company. Tesco's upgraded guidance for the year, expecting full-year '25/'26 group adjusted operating profit of between GBP 2.9 billion and GBP 3.1 billion, further supports this outlook.

Competitive Positioning

The competitive environment in the UK retail sector is intense, but Tesco has responded well, investing heavily in price and accelerating its Save to Invest program. The company's customer sentiment is mixed, but it has prepared well for the Christmas period. Tesco's food inflation is below the market rate, and the company has seen strong volume and mix benefits.

Strategic Initiatives

Tesco's investments in online, logistics, and slots have been successful, with growth in grocery home shopping, Whoosh, and F&F online. The company sees a long way to go in terms of investment, particularly in personalization capability and retail media opportunities. The Booker acquisition has provided access to the out-of-home market, with Booker performing well, taking share and growing ahead of expectations.

3. NewsRoom

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UK Food & Grocery Markets Report 2024-2025 and 2029 with Profiles of Leading Players - Tesco, Morrisons, Aldi, Marks & Spencer

Dec -04

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UK's cheapest supermarket in November revealed

Dec -03

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There’s a ‘once-in-a-generation opportunity’ in these stocks right now, no matter how the AI boom ends, market veteran says

Dec -01

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UK firm Borough Broth attracts investment from Piper

Dec -01

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How Fresh Analyst Sentiment Is Shaping the Tesco Story

Nov -30

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Pro-Palestine activists descend on Tesco in row over suspended worker

Nov -25

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What is the salary sacrifice scheme and why is it in Reeves' sights?

Nov -24

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FRC weighs investigation into PwC audit of WHSmith – report

Nov -24

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4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (2.80%)

6. Segments

Retailing and Associated Activities

Expected Growth: 3.0%

Being the core business, it has the potential for steady growth through diversified retail channels and associated activities, slightly outperforming the global average growth hypothesis.

Insurance and Money Services

Expected Growth: 2.5%

Operating in a competitive financial services market, the growth might be slightly constrained. However, being part of Tesco's ecosystem, it still maintains a reasonable growth rate, albeit slightly below the global hypothesis.

Banking Operations - Discontinued Operations

Expected Growth: 0.0%

As the operations are being discontinued, there will be no new growth, and the segment is expected to wind down, hence a 0% growth rate.

7. Detailed Products

Groceries

Tesco offers a wide range of fresh produce, meat, dairy products, bakery, and other food items for daily consumption.

General Merchandise

Tesco sells a variety of non-food items such as clothing, homeware, electronics, and health and beauty products.

Fuel

Tesco operates petrol stations across the UK, offering fuel for vehicles.

Tesco Bank

Tesco Bank provides a range of financial services including credit cards, loans, savings accounts, and insurance products.

Tesco Mobile

Tesco Mobile offers mobile phone contracts, handsets, and accessories.

Tesco Home Services

Tesco provides home services such as broadband, TV, and phone packages.

Tesco Opticians

Tesco Opticians offers eye care services, glasses, and contact lenses.

Tesco Pharmacy

Tesco Pharmacy provides health and wellbeing services, including prescription collection and health checks.

8. Tesco PLC's Porter Forces

Forces Ranking

Threat Of Substitutes

Tesco faces moderate threat from substitutes such as online grocery shopping, discount stores, and local markets. While these alternatives are available, they do not pose a significant threat to Tesco's market share.

Bargaining Power Of Customers

Tesco's customers have high bargaining power due to the availability of alternative retailers and the ease of switching. This forces Tesco to maintain competitive prices and invest in customer loyalty programs.

Bargaining Power Of Suppliers

Tesco's suppliers have low bargaining power due to the company's large scale and market dominance. This allows Tesco to negotiate favorable prices and terms with its suppliers.

Threat Of New Entrants

The threat of new entrants is low in the UK grocery market due to high barriers to entry, including significant capital requirements and established relationships with suppliers. New entrants would struggle to compete with Tesco's scale and market presence.

Intensity Of Rivalry

The UK grocery market is highly competitive, with several major players vying for market share. Tesco faces intense rivalry from competitors such as Sainsbury's, Asda, and Morrisons, which drives prices down and forces investment in marketing and promotions.

9. SWOT Analysis

Strength

Weaknesses

Opportunities

Threats

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

Value
Debt Weight 40.07%
Debt Cost 6.52%
Equity Weight 59.93%
Equity Cost 6.52%
WACC 6.52%
Leverage 66.86%

11. Quality Control: Tesco PLC passed 4 out of 9 key points

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

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Imperial Brands

A-Score: 7.7/10

Value: 5.8

Growth: 5.3

Quality: 6.3

Yield: 9.4

Momentum: 9.5

Volatility: 9.7

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Ahold Delhaize

A-Score: 6.9/10

Value: 7.1

Growth: 5.8

Quality: 5.0

Yield: 6.2

Momentum: 7.5

Volatility: 10.0

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Tesco

A-Score: 6.5/10

Value: 5.3

Growth: 5.9

Quality: 3.4

Yield: 7.5

Momentum: 7.5

Volatility: 9.3

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Coca-Cola Europacific Partners

A-Score: 6.0/10

Value: 3.6

Growth: 6.0

Quality: 5.0

Yield: 6.2

Momentum: 10.0

Volatility: 5.0

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Essity

A-Score: 5.5/10

Value: 5.1

Growth: 5.4

Quality: 5.7

Yield: 6.2

Momentum: 0.5

Volatility: 10.0

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Colruyt

A-Score: 5.2/10

Value: 7.7

Growth: 4.6

Quality: 4.3

Yield: 6.9

Momentum: 1.0

Volatility: 7.0

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Peers Metrics

12.e Scoring Insights

12.f DCF BETA

Parameters

Short Term Growth

Short term Time

Long-Term Growth

WACC

Target Price

4.53$

Current Price

4.53$

Potential

-0.00%

Expected Cash-Flows