FTSE 100 retailer Tesco (LSE:TSCO) has seen its share price drop sharply in recent weeks. Yet someone who made a lump sum investment in the business a year ago would now still be sitting on a tidy profit.
At 315.7p per share, Tesco shares were recently dealing 12% higher than they were 12 months ago. It means that someone who invested £10,000 in the supermarket chain back then would have seen the value of their holdings rise to approximately £11,197.
On top of this, our investor would have received dividend income of roughly £443 in that time.
Signs of growing competition are a troubling omen for Tesco’s share price going forwards. Indeed, the grocer said as much on Thursday (10 April) when it warned profits would drop this financial year.
But then the firm’s strong operational performance of late suggests it may withstand the worse of such pressures. So can Tesco shares bounce back from recent weakness, and should investors consider buying the business for their portfolios?
Recent resilience
Food competition has always been fierce in the UK. It went up several notches after the 2008 financial crash, when cost-conscious shoppers flocked to discount chains Aldi and Lidl and sparked a rapid programme of expansion.
Yet despite this ongoing problem, Tesco’s position at the top of the tree has never been under threat. In fact, last year market share improved 67 basis points to 28.3%. Over the Christmas period, it rose to its highest level since 2016.
To put this in context, the market share of second-placed Sainsbury’s sits way back at 15%-16%.
Tesco’s has some really powerful weapons that it’s used to great effect to defend its position, like a huge online grocery operation and significant brand power. It also operates the gigantic Clubcard reward scheme, which keeps millions of loyal members streaming through its doors with special deals and coupons.
These factors drove Tesco’s revenues 3.5% higher in the 12 months to February, Tesco said this week. Consequently, adjusted operating profit jumped 10.6% year on year.
Under pressure
Yet while Tesco’s recent resilience has been impressive, I haven’t been tempted to buy its shares for my portfolio. I feared that it was a matter of time before it started having to fight fires again. This week’s trading statement has confirmed my suspicions.
Despite last year’s profits bounce, Tesco’s warned that “we have seen a further increase in the competitive intensity of the UK market” in recent months. And so it predicted adjusted operating profit would drop to between £2.7bn and £3bn in financial 2026, down from £3.1bn last year.
The increased strain Tesco’s recently felt could get much worse, too, as Asda prepares to overhaul its pricing strategy. Britain’s third-biggest grocer is about to launch its deepest price cuts for 25 years, a move analysts think could see it undercut its major rivals by as much as 10% on some goods.
At the same time, Aldi and Lidl plan to cut the ribbon on hundreds of new stores over the next several years, potentially adding further strain to Tesco’s weak margins. These were up last year but still too thin for comfort, at 4.5%.
I think Tesco’s share price could keep sinking as the reality of its tough trading landscape becomes clearer. So I’d rather buy other stocks for my portfolio.
This post was originally published on Motley Fool
