Is Tesco a Long Term Buy as Economic Winds Shift

Tesco shares have defied the broader gloom surrounding the UK economy this year, notching up a gain of 21 percent and outpacing the FTSE 100 by five points. This comes alongside a 4.3 percent rise in like for like sales during the first half of the current financial year. Tesco’s robust interim results even prompted an upward revision to its full year guidance, with expected operating profits now between £2.9 billion and £3.1 billion, beating previous forecasts. All of this has been achieved while inflation remains above the Bank of England’s 2 percent target and consumer confidence languishes far below pre Covid levels.

Despite persistent economic challenges, real wage growth in the UK has supported consumer spending since April 2023. As a result, retail sales in September hit their highest mark in over three years. Forecasts now suggest inflation will fall to the central bank’s target by mid 2027, paving the way for possible interest rate cuts and an improving economic growth outlook. Increased consumer spending power could make shoppers less focused on price, creating an opportunity for margin improvement among leading grocers.

Within this landscape, Tesco appears well positioned. Rising customer satisfaction and an expanding market share, now at 28.4 percent, underline its competitiveness. With 24 million Clubcard holders contributing to a loyal customer base, Tesco can expect relatively resilient sales even if prices rise. Planned cost savings of £500 million this year provide further tailwinds for long term profitability.

The recent sale of Tesco Bank allows management to focus solely on core retail operations, including its substantial presence in online groceries. Tesco’s 36.9 percent share of UK online grocery sales leaves it well placed to benefit as more shoppers turn to digital channels. With online now accounting for 27.5 percent of all UK retail sales, the company’s investments in this area are likely to pay dividends over time.

Financially, Tesco’s balance sheet remains solid. Net debt to equity sits at 92 percent and its operating profits cover interest costs more than five times over, reasonable figures for a defensive player in the food retail sector. While tighter fiscal policy and political uncertainties could introduce bumps in the road, current fundamentals look sound.

With an earnings multiple of 16.4, Tesco’s shares offer value relative to the stability and growth prospects of the business. A strong strategy and loyal customer base give Tesco the tools to capture upside from a more favourable economic climate. Longer term investors may find Tesco’s shares worth holding as the company continues to strengthen its position in UK retail.