U.K.-based leading supermarket chain Tesco (GB:TSCO) has shown resilience amid elevated inflation levels and difficult macro conditions in the country. TSCO share price has advanced over 11.5% year-to-date and analysts see further upside potential.
Tesco recently slashed prices of over 500 essential items, indicating that the spike in grocery inflation is starting to ease. The company dropped its prices on these offerings by 13%, on average. Prior to Tesco, rival supermarket chain Sainsbury (GB:SBRY) and discounter Aldi also announced price cuts to offer relief to customers from rising prices.
Tesco’s Latest Financial Update
In an update provided in mid-June, Tesco reported an 8.2% rise [like-for-like (LFL) basis] in group retail sales (excluding value added tax and fuel) to £14.8 billion in the 13 weeks ended May 27, 2023. The company said that it maintained its market share at 27.1%.
Tesco experienced solid momentum in its large stores, with sales up 9.9% LFL. Meanwhile, online sales grew 8.2%, with online market share rising 75 basis points to 37.5%.
Tesco continued to attract value-focused shoppers by matching its prices with discounter Aldi. The company increased its “Aldi Price Match” to 700 products. The company is also gaining from the increased adoption of its Clubcard loyalty scheme.
Tesco reiterated its full-year guidance of a “broadly flat level” of retail adjusted operating profit and retail free cash flow within the range of £1.4 billion to £1.8 billion.
Recent Ratings
On June 20, HSBC analyst Paul Rossington increased the price target for Tesco shares to 330p from 305p and reaffirmed a Buy rating.
Last month, Bernstein analyst William Woods said that he expects an upgrade to Tesco’s profit guidance later this year and projects retail EBIT (earnings before interest and taxes) to grow more than 4% compared to the company’s flat guidance.
The analyst noted that Tesco has seen early signs of easing inflation, a trend expected to continue for the rest of this year. Woods added that he was not worried about margin pressure “despite expectations of disinflation as overall inflation will remain higher for the U.K. for 2023 and lower price pass-through will be offset by trade-up & better volume.” Woods has a Buy rating on TSCO with a price target of 300p.
In early June, JPMorgan analyst Borja Olcese lowered Tesco’s price target to 270p from 290p but reiterated a Buy rating.
What is the Future Price of Tesco Stock?
Tesco shares earn a Strong Buy consensus rating based on eight unanimous Buys. The average price target of 306.75p indicates 23.2% upside.
Aside from Tesco, another U.K.-based share with an attractive upside is Aviva (GB:AV), one of the leading insurance players in Britain, with franchises in Ireland and Canada. Aviva scores a Strong Buy consensus rating based on four Buys and one Hold. The average price target of 507p implies 30.1% upside. AV shares have declined nearly 9% since the start of this year.
Conclusion
Analysts are very bullish on Tesco’s long-term potential. The company’s leading position in the U.K. supermarket space and its efforts to drive further market share by offering products at competitive prices are expected to boost future growth. Moreover, TSCO offers an attractive dividend yield of 4.4%.
