Tesco shares surge after recovery story takes root

Added 5th October 2016

The market was enticed by Tesco’s recovery story Wednesday morning, leading to a 10.6% jump in the supermarket’s share price to 208.7p.

Tesco shares surge after recovery story takes root

The British grocer was the best performing FTSE 100 stock of the morning by some distance, blazing past fellow food retailers Morrisons and Sainsbury’s that were trading 1.6% and 1% higher, respectively.

Unlike Sainsbury’s, which posted declining sales over two consecutive quarters, Tesco returned its third successive quarter of positive like-for-like growth.

At the interim stage, total like-for-like group sales grew 1%. Excluding VAT and fuel, group sales amounted to £24.4bn, up 3.3% from the previous year.

Tesco’s UK business enjoyed like-for-like sales growth of 0.6% and saw volumes increase by 2.1%.

Despite the sales growth reported across all parts of the group, pre-tax-profits were down 28.3% to £71m.

Chief executive Dave Lewis said in a statement that Tesco had “made significant progress against the priorities we set out two years ago” and emphasised the stability of the business in an uncertain market.

Lewis also reiterated that Tesco was well on its way to reducing operating costs by an additional £1.5bn through more efficient distribution systems and simpler store models.   

“The business numbers are all looking pretty positive and that has obviously fed through to the share price,” observed Laith Khalaf senior analyst at Hargreaves Lansdown.

And while Khalaf agrees that Tesco’s story is one of recovery, he cautions that the firm still has some issues to overcome.

“There are some storm clouds on the horizon, one of which is the pension deficit. At the moment, it is a problem on paper but that might crystallise into a call for some cash over the next year.”

The long-term pension deficit arrangement weighed heavy on Tesco’s balance sheet and was higher than anticipated (£5.9bn) due to lower bond yields.

“Also, the supermarket environment remains extremely competitive with pressure from disruptors like Aldi and Lidl," Khalaf continued.

"There are rumours abounding that ASDA may be about to kick off another price fall. And then there is the cost input pressure coming from imported goods thanks to the sterling weakness which Tesco and competitors will have to manage either by absorbing itself or passing it along to their customers.”

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