Investors Anticipate Larger Guidance Increase from Tesco, According to Jefferies

Tesco’s latest results have elicited mixed responses from analysts, particularly at Jefferies, who pointed out that investors had anticipated a more significant upgrade in the company’s guidance following its robust performance.

The supermarket chain reported a notable 7% EBIT beat for the first half of 2024, exceeding consensus expectations. However, the subsequent guidance adjustment was more conservative than the market had hoped for, leaving some investors feeling somewhat disappointed.

Jefferies highlighted that, despite Tesco’s strong performance, particularly a 10% earnings per share beat, the increase in full-year EBIT guidance—now anticipated to be “around £2.9 billion,” up from “at least £2.8 billion”—did not align with the more ambitious expectations.

This cautious approach from Tesco contrasts with the stock’s strong momentum ahead of the report, as the shares had risen by 24% year-to-date and 17% over the previous three months.

Even with the conservative guidance, Jefferies stressed Tesco’s capacity to generate free cash flow and income, which remains a significant positive aspect. The brokerage continues to expect that the high end of Tesco’s retail free cash flow range of £1.4 billion to £1.8 billion is the most likely scenario, especially following the company’s delivery of £1.26 billion in the first half.

Despite this upward revision falling short of the more optimistic forecasts from some market participants, it still reflects Tesco’s solid performance across various divisions, including strong UK grocery sales and improving international operations, particularly in Ireland and Central Europe. However, analysts noted that the retailer experienced slight underperformance in areas like fuel and the Booker wholesale division, which did not meet expectations.

Shares of Tesco rose by 1.8% on Thursday.