The Tesco PLC (LSE:TSCO) results and new financial guidance on Thursday morning hit not only its own shares but also those of its grocery sector rivals, with analysts saying the UK's largest supermarket is "up for a fight".
Tesco shares fell 6.6%, J Sainsbury PLC (LSE:SBRY) dropped 4.9% and Marks and Spencer Group PLC (LSE:MKS) slid 2.6%.
The supermarket group said it was "providing guidance that gives us flexibility and firepower", which analysts at Jefferies said "could represent an interesting opportunity".
Shore Capital analyst Clive Black said the words from the market leader amounted to "getting the knuckle-duster out".
Tesco "executed very well" in the past year, Black added, marginally beating profit expectations, providing shareholders with a 13.2% increase in the dividend and a £1.45 billion buyback spread out over the coming 12 months.
However, there is a "new UK sector dynamic" following rival Asda bringing back its 'Roll Back' price campaign, he added. "And whilst there is no price war at present, Tesco is giving the market a clear statement that it is up for a fight."
As such, new financial guidance from Tesco pointed to lower underlying profits, which Shore Cap calculated to be around a 6-9% cut.
While shaving forecasts at the start of the year is not ideal, Black said, Tesco was "basically saying to shareholders, the competitor set, the supply chain and shoppers, 'take us on and we will win'."
Garry White at Charles Stanley said investors would be more focused on the "potential trouble spots in the current year rather than the success of the year gone by".
He said the guidance for lower profit this year reflected a series of rising costs combined with what he sees as an emerging price war sparked by Asda last month.
Most UK employers are facing higher employee National Insurance payments and an increase in the minimum wage, while many retailers also have to absorb a new packaging tax created to fund recycling projects.
"That’s before we consider the economic upset caused by Donald Trump’s trade war to navigate," said White.
"Tesco’s guidance could prove to be conservative, but it will be a while before we know this is the case."
Shore Capital remained positive on the shares, reiterating a 'buy' rating and saying the group is "executing very well and giving itself wiggle room to be competitive.
"Tesco has a strong financial constitution. It is defensive in this crazy world. It is also thinking about tomorrow today from a position of strength," said Black.
Jefferies also reiterated a 'buy' stance and said the company's call with analysts later on Thursday would see more detail shared and enable the City to "triangulate both guidance and TSCO's response to Asda more fully".
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