Shares in Tesco (LSE: TSCO) dipped 2.4% in early trading this morning despitethe UKs largest retailer releasing apositivetrading update for Q3 and the key Christmas period. Lets delve intothe figures and ask whether, in spite of todays dip, investors should now consider adding the 17bn capto their portfolios.
Festive cheer
In the 13 weeks to November 26, group like-for-like sales at Tesco roseby 1.5% with UK growth at 1.8%. The latter led the company to report its first quarterly market share gain since 2011 and the eighth consecutive quarter of like-for-like volume growth.
Trading over Christmas was equallypositive.In the six weeksto 7 January, group-like-for-like sales rose 0.3%, with growth in the UK reaching 0.7%. All-important food sales were upby 1.3%, continuing the trend setby peers Morrisons and Sainsburys earlier this week. The company also reported healthy growthin clothing and toy sales (4.3% and 8.5% respectively).
Once Drastic now Dependable Dave Lewis CEO of Tesco was suitably upbeat, reflecting on the sustained strong progress being made across the company. According to Lewis,the Welwyn-based businesswas well-placed to deliver on itsplans to be more competitive for customers, simpler for colleagues and a better partner for its suppliers. Althoughinternational sales werent quite as satisfying (up 0.6%), hestressed that Tesco had continued to improve its offering to customers despitechallenging market conditions.
In closing the update, the company stated that it was on track to deliver at least 1.2bn group operating profit for the full year the results ofwhich will be released to the market in April.
Now a buy?
After a bleak few years, 2016 proved to be an excellent 12 months for holders of Tesco as several promising updates indicatedthe business had begunto recapture some of its past form. While nowhere nearthe dizzy price heights achieved almost 10 years ago (475p), the shares are up22% since last January to 204p.
That said, market reaction to todays results suggests that some investors are still to be convinced. This is understandable. While the company appears to be doing all it can to simplify its business and focus on key markets, the intense competition in the grocery sector isnt going away. Although tight-lippedon like-for-like sales growth, the otherwise decentnumbers released by Aldi and Lidl over the last couple of days show the extent of the challenge facing the three listed supermarkets.
Looming inflationwont help. While todays update highlightedthatthe company would be doing all it could to offer the best possible prices to shoppers, thereremains the very real possibility that things will get tougher for Tesco and its FTSE 100 peers over the next 12 months. Suppliers can only be squeezed so far and the company needs to be careful that it doesnt burn the very bridges it sought to build sinceallegations of unreasonable behaviour towards the former came to light.
Theres another reason to avoid Tescos shares for now. After its infamous accounting scandal, the businessis still to resume paying dividends. With so many other companies in arguably less-competitive markets offering decent, well-covered yields, Tescos lack of regular payout is a real issue for me.
In sum, todays update was another undeniably positive step for Tesco. But a screaming buy? I think not.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.