Tesco’s profitability improves as inflation cools

Booker sales fell 1.9%, with lower tobacco and Best Food Logistics volumes offsetting strength in catering.

From a channel perspective, all formats grew, led by digital growth of 9.3%.

Morningstar Key Values ​​for Tesco

• Economic moat: None
• Estimated fair value: GBX 316.00
• Term dividend yield: 3.41%
• Morningstar rating: 2 stars
• Sector: Consumer protection
• Morningstar Uncertainty Rating: Average

In the UK, market share increased by 62 basis points year-on-year to 27.8%, with a strong performance, particularly from big box stores.

Ireland also saw an increase in market share, rising 88 basis points year-on-year to 25.3%.

We were also pleased to see Central European sales up 0.6%, signaling a gradual improvement in consumer sentiment.

Operating profit increased by 15.6% compared to the prior year period, implying a margin of 4.7%, driven mainly by retail operations.

Combined operating profit in the United Kingdom and Ireland increased by 9.8% and operating profit in Central Europe increased by 6.5%.

Thanks to the stronger-than-expected performance in the first half of the year, management raised its fiscal 2025 forecast for adjusted operating profit to £2.9bn, up from £2.8bn.

The firm continues to expect to generate retail cash flow of £1.4bn to £1.8bn, in line with medium-term guidance.

Given that we were previously ahead of operating profit guidance, we maintain our fair value estimate of 316p.

We reiterate that Tesco is one of the best positioned grocers in our European coverage.