The Tesco share price has been trending lower recently, and last week it fell to a 15-month low. Even though the underlying business is performing well, fears about rising operational costs and squeezed consumer pay packets are hanging over the stock. In March, the retailer revealed impressive full year figures as total retail adjusted operating profit jumped by 35.8% to £2.6 billion. Both the UK & Ireland and the Continental European operations performed well as sales continued to rise, while Covid-19 related costs fell – making it a win-win situation. Statutory revenue rose by 6%. Cashflow is crucial to a successful business, and it surged by almost 70% - partially from a lower pension contribution and from higher profit. As the cashflow was so strong, that helped bring down net debt by £1.4 billion. By reducing its outstanding loans, Tesco is making itself nimbler, which will put it in a better position should three be an economic downturn. The supermarket giant proposed a final dividend of 7.7p, taking the total pay out to 10.9p, up 19.1% on the year. The generous dividend not only keeps shareholders sweet, it also projects an air of confidence. In addition to that, the firm plans to carry out a £750 million share buyback scheme over the next 12 months.
Despite the solid full year numbers, Tesco’s share price came under pressure as the outlook was a little on the downbeat side. Next year’s total retail adjusted operating profit is projected to be between £2.4 billion and £2.6 billion. The not-so-hot outlook is down to concerns about inflation as well as a belief that consumers behaviour will continue to normalise now the pandemic is over. Worriers about disruption because of the war in Ukraine as well as supply chain issues connected to the recent lockdowns in China are also hanging over Tesco’s share price.
Looking at the consumer sector, things are looking less rosy as there are frequent headlines about a cost-of-living crisis. Average earnings in the UK are growing at 7%, but CPI has increased to 9%, its highest mark in 40 years. The nation is bracing itself for a squeeze in living standards. In the years after the banking crisis, well established names like Tesco lost ground to the deep discounters like Lidl and Aldi. Should the UK suffer an economic downturn, it is possible supermarkets will engage in price wars, but it seems as if Tesco are in a better financial position these days to endure such a conflict.
Tesco will publish its first quarter update on 17 June.
Tesco’s share price has been in a downtrend since late February, and while it remains below the three simple moving averages, the bearish trend could continue. The MACD indicator shows us that momentum is in negative territory, indicating the bears are in control. Further losses from here could see it target 240p. A rally might encounter resistance at 263p, and a break above that level could see it target 279p.