Morningstar

Tesco Earnings: Free Cash Flow Ahead While Fresh Share Buybacks Support Top Pick in Grocery

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Securities In This Article
Tesco PLC
(TSCO)

Tesco TSCO announced fiscal 2023 results with retail sales up 5.1% on a one-year like-for-like basis, with U.K. and Ireland sales up 4.7% (U.K. up 3.3%, Republic of Ireland up 3.3%, and Booker up 12%). Booker remains a strong contributor, with like-for-like sales growth at 12% (partially reflecting the benefit of lapping lockdown impacts), which, along with Central Europe (up 10.4%), were the standout performers for the group. On profitability, Tesco’s retail business reported GBP 2.487 billion, and the bank’s GBP 143 million in adjusted operating profit was broadly in line with our estimates. More importantly, free cash flow came ahead of our estimates at GBP 2.133 billion versus about GBP 1.8 billion in our model, driven by strong working capital and efficiencies. Management introduced guidance for fiscal 2024 calling for “broadly flat level of retail adjusted operating profit and retail free cash flow within target range of GBP 1.4 billion to GBP 1.8 billion” versus close to GBP 1.8 billion in our model. Although we don’t expect to materially alter our GBX 298 per share fair value estimate, we reiterate that Tesco is one of the best-positioned grocers in our Europe coverage. At the current share price and despite a 19% share price appreciation year to date, Tesco’s expected returns look attractive versus peers. We attribute this to a 7% cash return to shareholders through a regular dividend (about 4% fiscal 2023 dividend yield, in our estimates) and a stepped-up share-buyback program (GBP 750 million over the next 12 months or around 3% of market cap on top of GBP 1 billion share buyback program since October 2021). Tesco also has dominant offline (27% market share), online (35% market share), and food-service (largest player) positions in the core U.K. market, and potential upside from ad opportunities in the digital platform and automation-driven online fulfillment efficiencies.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Ioannis Pontikis, CFA

Director of Equity Research in Europe
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Ioannis Pontikis, CFA, is a Director of Equity Research in Europe for Morningstar*. He covers European grocers and global food and beverage companies like Tesco, Unilever, Nestle, and Danone, and manages a team of eight analysts across the Financials and Consumer sectors. He also leads Morningstar’s Equity Research Valuation Committee, advancing the firm's valuation methodology through projects such as developing new methodologies, refining our valuation model, and enhancing the efficacy of our ratings.

Before joining Morningstar in 2017, Pontikis spent six years on the buy-side, co-managing a $100M long/short equity fund and leading teams in applying machine learning to stock and equity factor selection models. He developed the fund's valuation and risk assessment framework, achieving strong risk-adjusted performance. Prior to this, Pontikis worked at Nestle S.A. in Athens, focusing on financial reporting, budgeting, and auditing proposals to improve processes.

Pontikis research has appeared in numerous media outlets including Bloomberg, CNBC, Reuters, Guardian, Frankfurter Allgemeine Zeitung among others.

Pontikis holds a bachelor’s degree in business administration from the University of Piraeus’s and a master’s degree in accounting and finance from the London School of Economics. He also holds the Chartered Financial Analyst® designation and studying towards an advanced post-masters degree in portfolio and risk management.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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