Shares in Tesco (LSE: TSCO) have been one of the FTSE 100’s best performers this year. Indeed, up until the end of last week, the shares had gained 11% year-to-date outperforming the FTSE 100 by approximately 12.5%. And during the first three months of 2016, Tesco outperformed all of its major blue chip peers racking up gains of just under 30% in the three months to the end of March.
Unfortunately, after last Friday’s sell-off Tesco’s year-to-date gains have been clipped to only 8.6%, but even this performance is incredibly impressive when you consider the fact that the UK’s leading FTSE 100 index remains unchanged on the year.
A repeat performance
Whether or not Tesco can repeat its impressive first half performance is a difficult question to answer. Throughout the first half of the year, investors flocked back to the company’s shares as it looked as if Tesco’s recovery was starting to gain traction. However, recently there have been developments that have threatened to endanger the company’s recovery and for this reason investors are now taking a more cautious view of the stock.
Still, according to research firm Kantar Worldpanel Tesco’s underlying sales performance continues to ‘improve’. For the 12 weeks to 22 May Tesco’s sales fell by 1%, the best performance among the UK’s largest retailers. For the period, the group’s market share grew to 28.3% from 28% a month ago. The wider UK grocery market also showed signs of stabilisation and recovery. The grocery market as a whole grew by 0.1% during the 12 weeks to 22 May, while food price deflation remained 1.5%, indicating that the industry as a whole enjoyed a positive performance over the past few weeks.
Reaping the benefits
Clearly, Tesco is reaping some of the benefits of the grocery market’s positive performance.
Nonetheless, the group is also facing a number of company-specific challenges that could curtail its recovery over the next six months. These challenges have been picked up by City analysts who are highly cautious about Tesco’s outlook.
For example, analysts at investment bank JPMorgan Cazenove warned a few weeks ago that the retailer is in worse shape than first impressions suggest as certain factors have helped window-dress the figures. Specifically, the company’s last set of full-year results were flattered by one-off benefits, such as the sale of non-core businesses, and the lack of any tax payment. Moreover, last year Tesco’s annual capital expenditure was unsustainably low at £1bn, below its annual depreciation charge. It’s also likely that Tesco will see its costs increase this year according to the broker, despite efforts to streamline the business.
The bottom line
So overall, shares in Tesco may have outperformed during the first half, but unless the company can prove that it really is on the road to a sustainable recovery, then it’s unlikely this performance will be repeated during the second half.