Headed For Another Decade High?

The Tesco share price (LON:TSCO) has struck new decade highs on multiple occasions this year. With its interim results due tomorrow, here’s what investors can expect, and what it would take for the stock to keep smashing its ceiling.

EBIT Conservative

Earlier this year, management toned down expectations of another strong year with its lower adjusted EBIT guidance range of £2.7-3.0 billion (FY25 adjusted EBIT was £3.13 billion). Despite that, the market has moved past this and is now forecasting the board to upgrade the lower bound of its guidance range tomorrow by at least £100 million – and I concur.

The initial conservative outlook was weighed down by two core worries. The first was the uptick in labour costs stemming from higher employers’ national insurance contributions and the national living wage. The second was from more intense competition, particularly from ASDA’s price reductions. Tesco was worried that the rollbacks would force lower prices, thereby eating into margins further, and a loss of market share.

However, as we covered in a previous article, ASDA hasn’t made much of a dent, and the threat has failed to materialise with further market share losses since the start of the year. In fact, ASDA has now recorded 18 consecutive months of negative sales. And with budget grocers also getting their margins squeezed from elevated commodity and labour costs, our base case remains that the industry will continue to price reasonably.

Inflated Expectations?

In the meantime, Tesco has continued to rally and build on its already ginormous market share. In both the 12 weeks to July and August, Britain’s largest retailer expanded its market share by another 0.7% to a record 28.4%, according to Kantar. Hence, it’s no surprise to have seen its sales growth reaccelerate to 7.7% from its already impressive 2-year low of 4.6% in October 2024.

So, what does this spell for Tesco’s H1 results tomorrow? Well, I’m expecting a strong report. I anticipate higher food inflation, paired with lofty market share gains to lift UK revenue by 6.1% to £24.79 billion, although I wouldn’t be surprised if the official figure comes in higher, either. I also estimate similar momentum from the firm’s Irish (+7.2% to £1.55 billion) and Central European bases (+4.7% to £2.12 billion), helped favourable FX in Q2.

For Booker, I’m projecting more modest growth of 2.9% to £4.76 billion due to weaker eating out activity in Q2. Meanwhile, I have fuel sales decreasing 10.0% to £2.98 billion. This should culminate to an adjusted EBIT of £1.52 billion – a touch lower than market consensus of £1.56 billion and H1’25’s £1.65 billion. Nonetheless, I imagine share buybacks should mitigate some of the decline in EPS, which I have at 13.63p vs 14.45p last year.

How We Get to Higher Highs

But with much of this already priced in to the stock, this then begs the question – how will it push to new highs? The answer lies in two key areas. The first is that tomorrow’s report must at the very least meet or beat consensus expectations. Failing to do so could see the Tesco share price fall. The second – and more crucially – is guidance. If the grocer guides for a narrower guidance range (>£2.80 billion), it could push its share price higher.

This, however, is unlikely, in my opinion. Uncertainties surrounding the Budget, business rates reforms, and even potential tax hikes are likely to keep a lid on any optimistic near-term outlook. Nevertheless, any indication that commodity inflation is easing and more importantly, a resilient consumer that continues to trade up to higher-margin SKUs like Tesco Finest and discretionary lines, will undoubtedly be well received by investors alike.

Even so, I’m convinced that the upside for the Tesco share price is limited from a valuation standpoint. I believe much of the future growth has already been priced in after incorporating the recent upgrades. And whilst I wouldn’t rule out a further rally from short-term and momentum-driven factors, I’ll need further evidence of strong market share growth and margin expansion over the next few months to move my already upgraded 450p price target.