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Tesco (LSE:TSCO) shares failed to join the broader market rally on Thursday (10 April), with the FTSE 100 retailer warning of a likely profits drop this year.
Last at 314.1p per share, Tesco’s share price was 6.3% lower on the day. It had sunk to nine-month lows of 310.4p earlier in the session.
Britain’s biggest retailer said intensifying price wars would drive its bottom line lower in the near term. But could Tesco shares now be cheap enough to consider buying?
Profits rise…
The supermarket industry’s notoriously competitive, and retailers have to perform a delicate balancing act of cutting prices without decimating their profit margins.
To be fair to Tesco, it’s made a good fist of navigating this tough environment more recently. Today’s update showed group sales up 3.5% in the financial year ended February, to £63.6bn. Adjusted operating profit leapt 10.6% to £3.1bn, which was actually ahead of forecasts.
Like-for-like sales were up 3.1%, driven by a 4% increase in its core UK operations. Volumes at home also came in ahead of expectations, which Tesco said was helped by “ongoing investments in product quality and innovation” across its food lines.
… but are tipped to reverse again
The bad news is that Tesco predicted things could get much tougher, pulling its shares through the floor.
While being in “the most competitive position and highest market share we have had for many years,” the grocer added that “we have seen a further increase in the competitive intensity of the UK market” over the last few months.
As a consequence, it expects adjusted operating profit to fall to between £2.7bn and £3bn in the current financial year.
Tesco’s adjusted operating margin rose 33 basis points in fiscal 2025, to 4.5%. But it remains in peril as a double-whammy of rising competitive pressures and major cost increases.
It said higher National Insurance contributions — which came into effect at the beginning of April — will alone take a £235m bite out of its bottom line this year. Tesco’s announced a £500m cost-cutting programme to help it navigate the problem of rising expenses.
Rivals stepping up
Tesco’s hugely successful Clubcard loyalty scheme is providing it from some protection against rivals. In fact, the business has relied heavily on it in recent times by offering lower ‘Clubcard Prices’ for its members.
But intensifying industry price wars mean that its influence may be limited going forward, and especially as consumer spending across its markets remains under the cosh. News last month that Asda — the UK’s third largest supermarket by share — plans to use what it descrives as a “pretty significant war chest” to slash shoppers’ bills comes with obvious risks.
At the same time, Tesco faces the long-running problem of aggressive estate expansion from its cheaper German rivals Aldi and Lidl.
Cheap but risky
Tesco deserves credit for its resilience in recent times. But recent successes could prove fleeting as competition tightens.
Today, the FTSE company trades on a forward price-to-earnings (P/E) ratio of 10.8 times. This is some distance below the five-year average of 18-19 times.
But even at these prices I’m not tempted to invest. I think there are much better UK value shares to consider right now.
