Tesco (LSE: TSCO) shares fell 2% following the release of the retailer’s first-quarter trading statement, extending a slide that had already begun in the days prior.
The FTSE 100 grocer reported like-for-like sales growth of just 1% in the three months to May, excluding fuel, falling short of the 1.4% rise that City analysts had pencilled in.
Tesco remains the dominant force in UK food retail, serving millions of customers through both its physical stores and a growing online operation across the country.
Analysts at RBC Capital have previously described the firm as the “best-in-class player in the UK Food Retail space, with a strong business model and an experienced management team.”
Despite that strong reputation, Britain’s largest retailer is proving vulnerable to the ongoing cost-of-living crisis, which continues to weigh on consumer spending habits.
The Booker wholesale division was the weakest performer during the quarter, dragged down by tough year-on-year comparatives and the exit of a lower-margin contract.
More concerning for investors is the performance of Tesco’s core UK retail arm, which accounts for roughly three-quarters of group revenues and posted like-for-like growth of 1.8%, half a percentage point below analyst expectations.
At 448p per share, Tesco trades on a forward price-to-earnings ratio of 15 times, sitting above its 10-year historical average of 11 to 12 times, leaving little room for further disappointment.
Stocks trading at a premium to their historical averages need to consistently meet or beat broker forecasts, and today’s miss has reinforced concerns that the current valuation is difficult to justify.
Inflationary pressures present an additional risk, with Tesco having limited scope to pass rising costs on to already-stretched consumers without the risk of losing footfall to cheaper rivals.
RBC Capital analysts have also flagged that “market share gains have moderated in recent periods,” adding that “competitors in the UK are starting to stabilise their volume losses,” pointing to a more competitive landscape ahead.
If upcoming trading statements continue to disappoint, analysts warn that a significant re-rating of Tesco’s share price could follow, putting further pressure on the stock in the months ahead.