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Can Tesco shares go much lower? Tesco share slide indicates UK retail pressures

By David Burrows

09:49, 6 October 2022

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In this article:
TSCOl
Tesco
2.2935 USD
-0.011 -0.480%
NXT
Next
58.80 USD
0 0.000%
OCDO
Ocado Group plc
6.880 USD
0.26 +3.950%
SBRY
Sainsbury
2.272 USD
0.01 +0.440%

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Tesco app on laptop next to calculator.
Tesco is under pressure to compete on price with supermarket discounters. Photo: Getty Images

It has been a bad couple of months for Tesco (TSCOI). The supermarket giant has seen its share price hit a five-year low.

The share price currently languishes around the 202p mark; compared to a previous low of 223p back in November 2017.

And in late August this year, the stock was priced around 270p before a steady descent to the current level.

The latest dip in share price follows Tesco trimming its profit forecasts for the year.

It now expects adjusted retail profits to come in at between £2.4bn and £2.5bn. Tesco had previously indicated they could go as high as £2.6bn.

In its interim results this week Tesco revealed adjusted operating profit was £1.24bn - down 10% from £1.38bn last year. 

The company also confirmed it would freeze the price of over 1,000 items until 2023 to help customers through the current cost-of- living crisis.

This move has demonstrated that the company is prepared to sacrifice some profit in favour of protecting market share.

Tesco (TSCOI) shares have dropped to a five-year low 

Russ Mould, investment director at AJ Bell argues that in an environment where consumers are being assailed from all sides by mounting energy bills, rising interest rates and higher costs for all manner of goods and services, companies selling essential staples rather than discretionary items are better placed.

“However, that doesn’t mean Tesco is immune from the weak consumer backdrop as its modestly lowered profit guidance reveals,” he says.

“Tesco has to try and offer attractive prices to stave off the competitive threat from the German discounters Aldi and Lidl and while it can rely on its purchasing power to some extent, it is still having to sacrifice margins to meet this challenge.

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“On the plus side, Tesco is entering a difficult period with a decent market position and solid balance sheet”.

However, Mould adds that it is hard to see the coming months as anything other than extremely difficult, with cost inflation affected not only by higher energy and labour costs but also the cost of importing goods from overseas thanks to the lower sterling.

“The profitability of its online shopping business, which seemed to finally come into its own during the pandemic, will also be affected as smaller basket sizes still cost the same to deliver,” he says.

Sector-wide pressures

Danni Hewson, financial analyst at AJ Bell also predicts tough times for Tesco - and other UK retailers in the same space.  

“Tesco’s whopping fall in pre-tax profits and warnings that shoppers are watching every penny sent its shares tumbling and pulled Sainsbury (SBRY)  and Ocado (OCDO) down with it.

“Concerns about how far consumers might have to cut back when all of winter’s pressures get a grip is a big worry for all retailers and with bellwether Next  (NXT) sending up warning flares, the upcoming earnings season is likely to deliver quite the blow to market sentiment”.

With Tesco at such a low valuation, does it offer investors an opportunity to buy the blue chip stock on the cheap?

While there could be more pain in store for Tesco yet,  for those seeing the company as a long-term play, there could be some value to be had at the current price level.

Marketbeat shows the consensus analyst rating for Tesco is a ‘moderate buy’ with a consensus target price of 310.83p.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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