Tesco PLC (LSE:TSCO) impressed investors and analysts with its interim results on Thursday, which included a small upward tweak to its full-year profit guidance.
The results were "strong" said UBS, most notably group adjusted profits of £1.65 billion comfortably beating consensus forecasts of £1.53 billion.
Retail profits came in at £1.56 billion versus the £1.49 billion consensus and Tesco Bank was much higher than expected at £94 million vs thanks to £42 million of one-off benefits as the sale to Barclays goes through.
UBS noted that second-quarter LFL sales growth of 0.6% was below its 1.0% forecast "with customers responding well to targeted value investments".
The strong performance was as expected, said analyst Frederick Wild at Jefferies, and "show a business thriving in a changing UK landscape", with the stock up over 25% in the year to date to reflect "a newfound appreciation" among investors for the group's merits.
"A 7% EBIT beat today should be the focus," he said, instead of an upgrade to guidance that is "perhaps a little more circumspect than anticipated".
Strong retail free cash flow of £1.3 billion, versus the average forecast for just over £1 billion, permits Tesco boss Ken Murphy (pictured) and co to plough ongoing self-improvement in the business.
This was a point made by Clive Black at Shore Capital, who said it was evidence of "measured expansion that displays good capital discipline, which we like".
The outlook for the UK grocery market "appears sound to us", Shore Cap's chief analyst added, noting that the grocery sector's volume growth is now more evident with "disinflation but not deflation" the trend.
With the annual value of the sector's revenues set to grow by around 2.5-4.5% per annum, ahead of annual new space at around 1%, Black said.
"Accordingly, the basis to anticipate quite stable gross margins in a rational market and robust to maybe accreting operating return on sales feels quite encouraging," he said, while adding that "we have not always been able to make this assertion, far from it."
Black said he can see the share price "not only holding its re-rating but, in the absence of disappointment and so ongoing delivery, actually expand further still", pointing to ongoing underlying earnings growth and free cash generation "that now fuels a notably compounding buyback [£1 billion for the current year] with Bank disposal proceeds yet to follow, and a still worthwhile income yield".