Tesco Expected to Post Positive Interim Results

The UK's largest supermarket chain is expecting to see further gains despite the economic situation and inflation, but has the market priced in too much upside?

The Key Factors

• Tesco's growing market share is expected to help boost the company's profits in the first half and raise its full-year guidance.
• The increase in market share has come at the cost of lowering prices amid an inflationary environment, which could condense profit margins.
• Analysts see challenges for the grocery market as a whole, particularly given the uncertainty ahead of the Autumn Budget.

Focus on Growth

Tesco will report first-half (interim) earnings before the UK market opens on Thursday, with analysts' consensus being for an upgrade in the company's outlook. According to the company-compiled consensus, on sales of £72.3 billion for the current fiscal year, which ends in 2026. Thursday's report is the halfway mark and is expected to reflect the company's growing market share, which could lead to a modest increase in the company's own guidance.

In its Q1 trading update, for profits to range from £2.7 to £3.0 billion this year and to have free cash flow of £1.4 to £1.8 billion, which will help fund the company's £1.45 billion share buyback. Tesco shares have risen 20% this year, amid expectations that the company will continue to outperform. As a result, it may need to provide a generous increase in its guidance for the year to satisfy investors and push the share price higher.

The Biggest Gets Bigger

According to industry data from Kantar, to September 7, the fastest growth since the end of 2023. This was achieved thanks to a 0.8 percentage point increase in the company's market share, which reached 28.4%. This represents a significant improvement over the 3.5% increase recorded during the company's prior fiscal year. Naturally, the company's executives cautioned last quarter about escalating competition and the necessity to maintain low prices as consumers seek out deals. This could keep pressure on the bottom-line margins and hurt the company's profitability, despite higher sales numbers.

While Tesco is managing to show gains, analysts have expressed concern for the grocery market more broadly due to rising food inflation and the possibility of new tax hikes going into a weakening jobs market. The upcoming uncertainty surrounding the Autumn Budget could leave executives striking an uncertain tone, which could weigh on the company's share price, even if it posts strong earnings.

Tesco Nears Critical Resistance

Tesco could be on its way to a new all-time high if it breaks out of its rising wedge pattern following repeated rejections at 445p. On the one hand, the longer timeframe shows a potential cup and handle, which brings into focus the measured move projection of 485p, just shy of the current ATH. Intermediate levels lie at 460p and 475p. On the other hand, if prices meet resistance at the upper wedge trendline near 450p, it could reverse the bullish trend, especially as momentum wanes on RSI. Support lies at 430p, the first wedge peak, followed by 420p and 405p, both swings of the pattern.

Source: SpreadEx | TESCO, Daily chart