“What a difference four months make… It was back in June that we watched somewhat puzzled as a TSCO Q1 sales beat was met with extreme caution,” observed the broker in a note issued in the wake of the supermarket giant’s interim results.
According to the broker, the interims “fleshed out the already visible strands emerging from the early stages of H1 [first-half] performance”.
The cherry on the top was the announcement of a GBP500mln share buyback.
“The outlining of a better-defined shareholder return equation seems to have earned TSCO the right to provide a roadmap to delivery without the need to flesh out all its constituent parts. In our view, the trading performance of recent quarters supports the improving burden of proof that’s being recognised by the market today,” Jefferies said.
The keys to the investment case, the broker argues, are Tesco’s dominant market share and the stabilisation of its margins.
“The flagging of some GBP1bn of savings over the next three years, combined with the promise of major digital revenues arising from a changing relationship with suppliers (allow access to the c.2m Tesco.com weekly shoppers), gives plenty of firepower to drive the group’s focus on ongoing improvements in the customer offering,” Jefferies said.
The market leader in the supermarket sector has been gaining share in recent months from all of its major grocery rivals and has in recent years “successfully reduced and then reversed share loss to discounters”, although the broker omits to mention that the hard discounters had a difficult lockdown owing to their lack of online offerings of any significance.
Tesco is now enjoying accelerating gains versus other grocers as greater loyalty appears to be locked in via ClubCard prices, Jefferies submits.
Anyone who has shopped in Tesco will have noticed that many items are cheaper for ClubCard owners, which is increasing brand loyalty and providing more data for Dunnhumby, Tesco’s customer data arm, to crunch through.
“The promise of incremental revenues from a fuller utilisation of Dunnhumby could add another important weapon at a time when some peers are shifting to a more leveraged ownership structure,” Jefferies said, as it reiterated its ‘buy’ recommendation.
Tesco shares currently trade at around 272p; Jefferies has a target price of 330p for the stock, with an “upside scenario” target price of 430p and downside target of 230p.