Tesco PLC (LSE:TSCO) releases full-year results on Wednesday and for Shore Capital, guidance for the current year will be key to how the shares fare henceforth.
The broker “nibbled back” its fiscal 2023 estimates last month, citing rising operating costs “set against a determination by the brand to remain price competitive, especially with Aldi in an inflationary environment”.
The company’s retail team has been doing a bit of shop-floor reconnaissance at the UK’s largest grocer and reckons Tesco remains operationally strong, scoring highly on “availability, cleanliness, assortment, Clubcard Prices and check out services”.
However, offering a reason for Shore to hold its forecasts “will be key to the group’s share price performance”.
“Holding such forecasts will be a good result to us, as the amalgam of essentials inflation, rising NIC [national insurance contributions] and the turn of the interest rate cycle rest against the increase in the National Living Wage,” it said in a note to its clients.
“We also note Tesco’s pay announcement of last week whereby it increased hourly pay from £9.55/hour to £10.10, plus a 90p increase for delivery drivers to £11.00/hour, which will cost c£200mln on an annualised basis (note that Sainsbury increased its hourly pay to £10.00/hour in January at a cost of c£100mln per annum, announcing a rise in the London weighting too last week). To the extent that the FY23 wage award is in forecasts remains to be seen,” it added.
The broker revealed it is more cautious on the UK consumer outlook these days, as heating costs rise, “Goldilocks inflation” has gone and the risk of easier volumes and trading down is greater; all of these factors have caused sentiment towards supermarket stocks to sour a bit but Shore sticks with its ‘buy’ recommendation.
Shares in Tesco currently trade at 273.4p, up 0.8%.