Tesco share price: what to expect from first-half results

• Tesco is set to report broadly stable revenue in the first half (H1) of its financial year but profits are expected to plunge as the coronavirus pandemic takes its toll
• Tesco’s new chief executive Ken Murphy took over just days ago, with the results setting the stage for him to outline his vision and strategy for the grocer
• Tesco shares have failed to bounce back from the sell-off in March and trade 17.5% lower than the start of the year
• Brokers are bullish on Tesco shares and see considerable upside to the current share price

When are Tesco’s first half results?

Tesco will release interim results on Wednesday 7 October, 2020. This will cover the six months to late August.

Tesco first half preview: what to expect?

It will be a big day for Tesco and for its new chief executive Ken Murphy, who only took the helm six days ago when he brought an end to Dave Lewis’s six-year reign. Murphy, previously an executive of pharmaceutical retail giant Walgreens Boots Alliance, will be looking to open a new chapter for the UK’s biggest supermarket chain as the industry goes through significant change.

He has already had some help from his predecessor, who agreed to sell off Tesco’s Asian business earlier this year as part of a strategy to cut down debt and turn Tesco from an over-stretched global retailer to an industry leader in the UK, Ireland and Central Europe.

This plan is unlikely to change, leaving Murphy to build on the existing strategy. However, he will still have tough decisions to make as he navigates the grocer through the pandemic and the tough economic times that lie ahead, and responds to the dramatic changes in the market.

At the top of the agenda for investors on Wednesday is when the £8 billion from the sale will be in the bank and what Tesco intends to do with the proceeds. The supermarket chain has said £5 billion will be returned to investors through a special dividend, twinned with a share consolidation.

The deal to offload around 2000 stores in Thailand and Malaysia is expected to be completed before the end of 2020. A £5 billion special payout would be worth around 51p per share based on the number of shares currently in issue. The ordinary interim dividend, which has remained intact during the pandemic, is expected to be paid.

Other news to look out for are updates on plans for Tesco Bank. Although the unit has five million customers, it is seen as another asset that could be sold off as part of Tesco’s intention to refocus the business. However, Tesco has had to increase provisions for bad debt at the bank in the current climate and it is not clear how much appetite there is among buyers right now. Tesco sold off its mortgage book to Lloyds last year.

Murphy will take the opportunity to put his vision for Tesco to investors this week and outline his ambitions for the firm. But there is a number of hurdles that he will have to overcome. The pandemic is swiftly changing the way we shop. Costs are rising but low prices will remain key to attracting customers considering the poor economic outlook.

Brexit remains up in the air, leaving questions over supply chains. Plus, a number of rivals could become more of a threat considering Ocado and Marks & Spencer (M&S) have teamed up, Asda is under new ownership, and Amazon is still thought to be considering making its big entry into the market, possibly by buying Morrisons or Sainsbury's.

Tesco first-half earnings: what does the City expect?

The industry has struggled to capitalise on the increased demand they have seen this year. For example, sales increased 9.2% in Q1 and like-for-likes (LfL) rose 8.2% - with online sales up by almost half. But Tesco is still forecasting annual operating profit to be ‘at a similar level’ to last year.

The consensus for H1 further demonstrates this point. Revenue is forecast to remain broadly flat year-on-year (YoY) but earnings and profits are expected to plunge.

One of the main reasons for this is that the pandemic has also pushed up costs. The shift online has been accelerated, and this erodes the industry’s already wafer-thin margins. The cost of providing an online service is much higher, but the prices people pay for goods remains the same.

Plus, Tesco and others have had to hire more staff to cope with demand and introduce new equipment to keep staff and customers safe. What’s worse is the fact supermarkets will have to keep prices low to attract customers, especially if unemployment rises as expected this year.

Tesco first-half earnings consensus

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How to trade Tesco’s first-half results

The release of Tesco’s H1 results will undoubtedly be a trigger moment for shares. You can speculate as to whether you think Tesco shares will rise and buy (go long) or, if you think they will fall, sell (go short) using CFDs.

1. Create an IG trading account or log in to your existing account
2. Enter ‘Tesco’ or its ticker, ‘TSCO.L’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

If you want to try your trading strategy risk-free then why not try an IG demo account?

Tesco shares: broker recommendations

Tesco shares have taken a battering this year. While most of the market bottomed out in March when lockdown measures were introduced, Tesco shares hit their lowest level since January 2019 on 2 October. They currently trade 17.5% lower than at the start of 2020 – in line with the FTSE 100.

The steep fall meant Tesco was briefly unseated as the UK’s most valuable grocer by tiny online rival Ocado on the last day of September. Tesco has reclaimed its prize but, with a market cap of £20.6 billion, it is only narrowly ahead of Ocado’s £19.3 billion valuation. That suggests investors place significant value on Ocado’s technology and prospects and Tesco is possibly undervalued considering Ocado generates less than £2 billion in annual sales versus Tesco’s £56 billion.

Brokers are bullish on Tesco shares ahead of the H1 results. The 15 brokers that cover the stock have an average Buy rating on the stock and a target price of 277.58p – implying there is over 31% upside to the current share price.

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Where next for Tesco?

Each of the UK supermarkets has a particular edge over their rivals. Sainsbury’s has Argos to offer more than just food, Morrisons makes most of its own food, Aldi and Lidl are the discounters, Ocado is purely online, Waitrose and M&S cater to quality, and Iceland specialises in frozen food.

Tesco is all about scale, bolstered by its size, ownership of wholesaler Booker and strategic buying partnerships with the likes of Carrefour. With this, Tesco is trying to beat all of its rivals at their own game. It wants to be the largest supermarket with the biggest physical presence, demonstrated by its vast store network and dominance in convenience stores.

It wants to maintain its leadership online and become the first to truly demonstrate it can be done profitably. And it wants to steal the prize of being the lowest-priced supermarket from the discounters. Scale is the best tool to have to achieve all these goals, but this refocused Tesco will have to prove it can be the leader in all aspects of grocery as it enters a new chapter under new management.