Tesco Q1 earnings preview: where next for Tesco shares?

Tesco is hoping for profits to bounce back this year after plunging during the pandemic and investors will be hoping for a solid start when it publishes its first-quarter trading update. We explain what to expect from the results and consider how the Tesco share price could react.

Charts (6)

When will Tesco release Q1 results?

Tesco will release a first-quarter trading update on Friday June 18. This will cover the three months to the end of May.

What to expect from Tesco’s results

Tesco’s last financial year was a challenge but delivered results. Profits and cashflow were hampered by the additional costs of the pandemic, such as hiring thousands of extra staff, dealing with increased absences and installing new safety equipment, but it grew its market share and poached customers from all its major competitors, which have also had to spend more to adapt.

Tesco also demonstrated its agility by more than doubling its online capacity to meet the surge in demand during lockdown, added millions of members to its revamped Clubcard loyalty programme by offering them exclusive discounts, and met its promise to take on discounters Aldi and Lidl by achieving its highest score for value perception in a decade.

Looking ahead, the operational progress made over the last year should start to translate to its financial performance. The boost in sales over the past year, driven by people cooking and eating at home during lockdown, will wane as restrictions are eased and hospitality and leisure sites fully reopen. Notably, lockdown restrictions were eased at the midway point of the quarter. This should be taken into account later this week considering Tesco’s quarterly updates focus on revenue and like-for-like growth. Plus, the fact sales rose 7.9% the year before means it will be coming up against strong comparatives.

Still, Tesco is expecting profitability and cashflow to improve as the majority of the additional Covid costs fall away this year and operating profit from its core retail business is expected to return to pre-pandemic levels by recovering toward the £2.81 billion delivered in the 2019/20 financial year after falling to £1.99 billion last year. Tesco Bank is also expected to escape the red at some point this year.

The biggest threat to the recovery in profits could be inflation and whether it plans to absorb any rise in food costs at the expense of its margins or pass them on to the consumer at a time when it is determined to focus on value and remain competitive with the discounters. Although data has shown the cost of food in the UK has declined in recent months, the cost of commodities is on the rise and looks set to bite at some point. The FAO Food Price Index, which tracks the global prices of the major food commodities, rose for the 12th consecutive month and experienced its largest-ever monthly rise in May, driven by higher costs for oils, sugar, cereals, meat and dairy products.

Tesco has so far refrained from providing precise guidance for the full year due to the uncertainty going forward, but investors will hope it can at least reaffirm the buoyant outlook provided in April.

Notably, Tesco’s results will set the stage for when its biggest rival Sainsbury’s releases its own first-quarter trading update on Tuesday July 6.

Where next for the Tesco share price?

After hitting a yearly high of 250p in January, the price tumbled lower to support at 217p. Since then, the price has been being forming a series of higher lows. 

Tesco trades above its ascending trendline dating back to early March. It also trades above its 50 & 100 EMA on the daily chart. The MACD is also supportive of further upside.  

Tesco has struggled to move above resistance at 235p. A break through this level is needed in order for the Tesco share price to 240p the high Feb 18 and also the late January 2020 low. 

On the flip side, support can be seen at 228p the 50 & 100 ema. A break below here could open the door to 224p the trendline support. Breaching this technical level could see the sellers gain traction towards 220p the April low. 

How to trade Tesco shares

You can trade Tesco shares with City Index by following these four easy steps:

  1. Open a City Index account, or log-in if you’re already a customer.
  2. Search for ‘Tesco’ in our award-winning platform
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade 

More from Equities

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.