Shares of Tesco (LSE:TSCO) have had a flat start to 2022 so far. But it’s worth noting that the stock has climbed nearly 20% over the past 12 months – not bad for a retail giant. So, what can I expect throughout the rest of the year? And should I be considering this business for my portfolio? Let’s explore.
The bull case behind Tesco shares
Regardless of what’s going on in the world, people still need to buy staple goods. And this actually gave the supermarket chain quite an advantage over most other retailers during 2020. As non-essential stores were forced to close their doors, Tesco could continue operating relatively undisrupted.
Consequently, revenue and income throughout the pandemic only appear to have been mildly impacted. And now that the world is slowly moving out of the pandemic, the remaining problems will likely resolve themselves. But one issue that could stick around for a while is supply chain disruptions.
Despite the challenges of importing goods due to the bottlenecks at UK ports, Tesco’s management appears to have found a solution. By ramping up its use of trains to deliver goods from Spain, the company has largely avoided the supply chain disruptions that currently plague the retail space. And since these issues could remain in place for quite some time, the advantage of having regular product shipments could result in increased footfall to Tesco stores as other shops don’t have what consumers are looking for.
Needless to say, this gives Tesco an upper hand over its competitors. And if the volume of sales increases, resulting in higher profits, the Tesco share price could equally benefit.
What could go wrong?
As impressive as its logistics infrastructure is, there are some valid concerns surrounding this business. Let’s start with product distribution. The company may have found a way to get goods into the UK. However, delivering them to the stores or customers doors has proven challenging. The shortage of HGV drivers and warehouse workers have forced Tesco to raise wages, increasing its labour costs and, in turn, putting further pressure on margins.
This pressure is only amplified by inflation. As the cost of goods increases, Tesco is forced to raise its prices as the profit margins on groceries are already exceptionally tight. But with the cost of living going up, consumers may turn to alternative value retailers like Aldi and Lidl to reduce their shopping bills.
As Tesco is a volume-selling business, any drop in sales could significantly impact the bottom line, pushing its shares in a downward trajectory.
To buy, or not to buy?
The threat of discount retailers is not new. And management has started doing something about it with its price-matching and Clubcard Benefits schemes. The latter is particularly interesting as it enables the business to gather valuable data on its customers to tailor special offers unique to individuals. This is quite a powerful marketing tool and could maintain sales volumes even in an inflationary environment.
With that in mind, I believe Tesco shares could be heading upwards in 2022. That’s why I’m considering adding some to my income portfolio.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
