Tesco PLC (LSE:TSCO) shares climbed 4% on Friday, with Sainsbury’s up 3%, as investors chose to look beyond a cautious profit outlook and instead focused on the sector’s reputation for resilience in tough economic conditions.
The gains helped reverse some of the declines seen earlier in the week after Tesco warned of the potential for lower profits in the year ahead.
Britain’s largest supermarket chain said on Thursday it expected operating profits to fall to between £2.7 billion and £3 billion this financial year, compared with £2.8 billion last year and below analysts’ consensus of £3.2 billion.
The more conservative guidance reflects an increasingly competitive market, with Asda recently slashing prices in an attempt to win back shoppers.
Chief executive Ken Murphy said the group’s decision to guide down expectations was deliberate, giving it the “flexibility and firepower” to defend market share if price competition intensifies.
Analysts at JPMorgan and Citi said the guidance was sensible, given the likely impact of higher labour costs and Tesco’s decision not to pass all of those increases onto customers.
Both banks noted Tesco’s strong balance sheet gives it room to invest in prices without significantly denting cash flow.
Citi flagged that Tesco remains in a strong position, even after its shares had slipped 6% on Thursday.
The stock was upgraded by some analysts on the basis of its reliable free cash flow, scale, and ability to weather economic headwinds better than smaller peers.
Despite the risk of a price war, the supermarket sector’s appeal as a defensive play has come back into focus.
With food retail seen as a staple purchase, investors often turn to names like Tesco and Sainsbury’s during times of uncertainty, especially when rising interest rates, wage pressures and geopolitical tensions, including the threat of new US tariffs, are clouding the broader equity outlook.
Tesco’s like-for-like sales rose 3.1% for the year, while group revenue climbed 4% to £63.6 billion.
Pre-tax profits dipped 3.2% to £2.2 billion, largely due to higher wage bills and a rise in employer National Insurance contributions. Still, free cash flow remained strong at £1.75 billion, toward the upper end of the company’s guidance range.
In the face of rising costs and intensifying competition, Tesco has opted for strategic caution. But for now, markets seem comfortable with that approach, especially with the supermarket sector once again demonstrating its defensive appeal.