Tesco shares worth 17% more

It's super busy at Interactive Investor HQ. With an army of retailers circling Thursday 12 January as the day to release crucial Christmas numbers, we're hard at work picking them apart.

Elsewhere, rounding off the supermarket reporting season is Tesco, which has just grown its share of the market for the first time in half a decade. It may have lost out on the festive crown this year, but it's getting talked up as a stock with decent tuck-away potential.

Flogging some of its UK non-core operations would have weighed on group sales had it not been for a few new stores. Underpinned by its UK business, group like-for-like sales jumped 1.5% in the 13 weeks ended 26 November and by 1.8% in the UK. Include the 0.3% revenue uptick in the six weeks since and turnover rose 1.1%.

After eight consecutive quarters of like-for-like volume growth, Tesco's share of the UK grocery market expanded for the first quarter since 2011. With its party food and "Free From" range flying off the shelves, the grocer managed to offset the absence of its Clubcard "Boost" promotion this Christmas, which pulled general merchandise sales down 0.8%. But clothing and toys had a stonker.

This slowdown in sales is "very forgivable" given how strong last year was, argues Barclays analyst James Anstead.

In momentum towards longer-term targets, Tesco's core UK business seems very much on trackAnd Tesco has upgraded profit forecasts for the year to February from £1.2 billion to "at least" £1.2 billion, a subtle change that should give investors' confidence ahead of numbers in April.

Anstead keeps his estimate of £1.245 billion underlying operating profit, implying a 60% jump in earnings per share (EPS) to 8p.

"Given the stage of the turnaround, current year profits are of limited relevance, in our view - the key is momentum towards its longer-term targets and Tesco's core UK business seems very much on track at this stage," says Anstead, who pencils in 10p of EPS for the year to Feb 2018.

Having ridden on the coattails of Morrisons and Sainsbury's this week, investors chose to dump Tesco Thursday, with its shares finding support at 200p. Even acknowledging that they trade on recovery multiples, the shares aren't exactly cheap, although, given long-term potential, Anstead thinks there is scope for a rally to 235p.

Behind the scenes

Crucial work behind the scenes has improved Tesco's service levels, stock flow and availability. With delivery timing improving to 98.9%, it cut stock held by £50 million on the year and improved availability during Christmas by 1%. Earlier this week Tesco announced that it was cutting 1,000 jobs in its distribution network.

Elsewhere, Irish sales inched just 0.1% higher across the 19 weeks, but International turnover slipped 0.1%. Last year was particularly strong overseas and the supermarket has struggled to combat weaker consumer spending in Thailand and a competitive backdrop in Poland. Over Christmas International sales fell 1.2%, but sterling's weakening did provide a positive tilt.

The clear product offering in Tesco Bank helped boost sales 6.7% across the 19 weeks, thanks to strong lending growth.

A potential squeeze on UK consumers as inflation gathers pace also threatens incomeWith industry concerns now locked on inflation, Tesco is working with its suppliers to keep prices as low was possible for customers. The typical basket is still 7% cheaper than in 2014, even though the deflationary landscape is changing.

Tesco's results round off a big week for the supermarkets, with Morrisons announcing an impressive 2.9% leap in like-for-like sales - the winner of Christmas. It was thanks to Argos that Sainsbury's posted any sales growth at all, with the catalogue chain growing 4%, but group turnover was up just 0.1%.

It's been a slog for a few years now, but there's more hard work to do. A potential squeeze on UK consumers as inflation gathers pace - higher input prices must be passed onto shoppers - also threatens income.

However, with the first market share gains in five years, a year of solid sales growth behind it and positive profit outlook, at least Tesco is pointing in the right direction.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.