Tesco PLC (LSE:TSCO) is “toughing it out well” against a challenging UK consumer backdrop, according to analysts.
Shore Capital analyst Clive Black noted the fall in annual profits from the grocer was slightly less than forecast and he expects to nudge up his earnings per share forecasts for the 2024 financial year.
He views a free cash flow yield of around 8% as attractive set alongside capital discipline and good cash-compounding credentials. As a result, Black reiterated a 'buy' rating.
Black pointed out that Tesco, alongside a number of British shopkeepers, navigated Christmas 2022 well, reflected in its New Year update, whilst quarter-four landed effectively too.
He believes Tesco is now an “effective cash compounder” capable of delivering attractive total sequential shareholder returns centred upon modest underlying earnings growth, dividend and recurring buyback.
Over at Barclays, analysts were also positive reiterating an overweight rating and 320p price target.
Tesco delivered a strong end to 2022/23, the bank said, with retail EBIT of £2.49bn at the top end of the guidance range and Retail free cash flow of £2.13bn well ahead of guidance.
The broker also pointed out that the flat profits guided by the company in the coming financial year implied a 2.5% upgrade to consensus EBIT forecasts.
Barclays explained the results also implied a strong end to the year. Overall, fourth quarter retail like-for-like sales growth of 8.2% suggests that January and February saw faster sales growth than December, analysts wrote.
In comments following the conference call with analysts, Barclays highlighted Tesco believes it has fundamentally repositioned on price and is dedicated to keeping the advantage it has built.
Tesco sees the market as rational, in other words, grocers are tending to pass on cost increases, while supermarkets price inflation hit a record 17.5% last month.
Tesco is excited about the potential for meaningful media monetisation income over a three-year period, it was noted.
Jefferies was also positive. Reiterating a 'buy' rating, the broker said the results "mark a distinctly improved tone from the more hesitant interims update of October."
Analysts said there were early signs of improving mix dynamics which suggest there is "upside risk" to current forecasts, which should reinforce Tesco's safe-haven credentials in the months ahead.
Reflecting the positive comments shares in Tesco sit 1.8% higher at 272p.