Analyst Note| Ioannis Pontikis, CFA |
Tesco announced fiscal 2022 results with sales of GBP 61.3 billion, up 6%, and EBIT at GBP 2.825 billion, up 58%; a strong set of numbers reflecting resilient performance (in-store, online, food, nonfood). Total coronavirus costs were GBP 220 million in fiscal 2022 versus GBP 892 million in fiscal 2021, with Tesco expecting about GBP 80 million of these to remain in fiscal 2023. Booker was also a strong contributor, with retail's two-year like-for-like sales at 11.9% and catering's one-year LFL at 56%. Retail operating profit in the U.K. and ROI grew robustly by 34.9% due to lower COVID-19 costs, stronger nonfood margin mix and operating efficiencies that offset inflationary pressures, with similar contributions for Central Europe (profit up 35.5%). Tesco Bank profits rebounded strongly as expected (GBP 175 million in fiscal 2022 versus negative GBP 175 million last year), with Tesco guiding for profitability of GBP 120 million-GBP 160 million in fiscal 2023 (versus GBP 121 million in our model). Tesco also provided retail profit guidance of GBP 2.4 billion-GBP 2.6 billion (versus GBP 2.58 billion in our model and GBP 2.81 billion for company-compiled consensus), reflecting "significant uncertainties in the external environment." Although we don't expect to materially alter our GBX 273 fair value estimate for Tesco, we reiterate it is one of the best-positioned grocers in our coverage. On the current share price, with about 7% cash return to shareholders through a regular dividend (about 4% fiscal 2022 dividend yield in our estimates) and recently announced stepped-up share buyback program (GBP 750 million over the next 12 months or 2.8% of market cap), dominant offline (27% market share), online (35% market share) and food-service (largest player) position in the core U.K. market as well as potential upside from ad opportunities in its digital platform and automation-driven online fulfillment efficiencies, Tesco's expected returns look attractive versus peers.