Tesco PLC (LSE:TSCO) has served up results that were solid rather than sparkling, but enough to keep the tills ringing for shareholders.
The supermarket giant yesterday raised its full-year profit guidance after reporting a first-half operating profit 6% ahead of City forecasts.
Group operating profit for the six months to August came in at £1.67 billion, comfortably above expectations, and free cash flow was a healthy £1.3 billion, some 21% better than analysts had pencilled in.
That left Tesco able to nudge up its full-year guidance to a range of £2.9-£3.1 billion, compared with the previous £2.7-£3 billion. In truth, the new target is broadly in line with consensus estimates, so it was not the big upgrade that might have lit a fire under the shares.
Sales growth told a more subdued story. Like-for-like sales, the key measure stripping out fuel and VAT, rose 4% in the second quarter, down from 4.6% in the first.
That was a touch below the 4.7% the market had been expecting, and reflects the industry’s gradual return to steadier trading after the inflation-driven boom in grocery sales.
Margins dipped slightly, with the group EBIT margin at 4.65%, about 10 basis points lower, but still a better outcome than analysts feared. Cost control and efficiency gains are continuing to cushion the effect of softer volumes.
The valuation leaves little headroom for surprises: Tesco trades on around 15 times forward earnings, compared with an average of 13 times for rivals such as Sainsbury’s and Ahold Delhaize.
That premium reflects its dominant market position and consistent delivery, but it also means yesterday’s beat, while reassuring, is unlikely to shift sentiment dramatically. For investors, Tesco remains the steady option in the shopping basket.
Citi rates the stock 'buy' with a 460p price target. The shares were flat at 452.3p.