Tesco PLC

Overview Key strengths Key risks Largest U.K. retailer, and leading domestic grocery player, with complementary wholesale and food service operations. High input cost inflation, the economic slowdown, competitive pressure from discounters, and still-lingering supply chain disruptions to hit Tesco's margins. Leading position and scale benefits in the large, albeit low margin, U.K. online grocery market. Significant lease commitments continue to account for the majority of operating and financial leverage, with £7.9 billion of lease liabilities constituting two-thirds of the S&P Global Ratings-adjusted debt. The retail business benefits from robust earnings-to-cash conversion, which compares favorably with that of other large European grocery retailers, following the successful deleveraging and turnaround of the business. Strong focus on shareholder returns. The capital allocation policy

...Tesco's half year results reflect weaker profitability from high inflation, price investments, and normalization of volumes. After COVID-19 restrictions drove a period of exceptional food demand, the market has progressively normalized since second-half 2021. This means competition is back, with retailers investing more in pricing to preserve market shares. Tesco's LFL sales for the first half of the financial year (FY) 2023 (ended Aug. 27, 2022), in the U.K. and Ireland retail business grew by 2.7% primarily on account of a strong rebound in the group's wholesale foodservice operation, Booker, which grew by 13.9%. At the same time, the group reported a 10% decline in its adjusted operating profit for its retail business. This was mainly due to a combination of reduced post-pandemic volumes exacerbated by higher costs and price investments. Lower volumes offset by price pass-throughs should enable Tesco to achieve moderate top-line growth. We expect the group's top line will grow moderately,...

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