Tesco Shares Not Factoring in Margin Recovery, Says Morgan Stanley

Tesco is set to announce its preliminary results on Thursday 13 April. The results will be closely watched by investors, as they provide an insight into how the supermarket has fared in the face of rising inflation.

Food inflation has weighed heavily on consumers over the last year, with data showing food inflation jumped to 18.2% in February.

Tesco’s Q3 results back in January saw strong sales, particularly over the Christmas period as the supermarkets investment in value and price resonated well with customers. However, profits may be impacted at Tesco’s as the company has been forced to pass on higher costs to consumers.

The retailer is well positioned to weather the current storm and its expansion in  its range of own-brand products, which are typically more affordable will help keep consumers spending at its stores. As a result, the group stated it anticipates retail adjusted operating profit of between £2.4bn and £2.5bn for FY22/23.

But, investors will be keeping a close eye on any updates of current trading and whether spending is beginning to unwind as inflation continues to test shoppers pockets.

Tesco’s was recently upgraded to Overweight from Equal-Weight at Morgan Stanley. Analyst Izabel Dobreva said the shares are not factoring in upside from the company’s margin recovery, as headwinds start to roll over from 2024.

Investors have remained sceptical of the current market climate, with recession fears continuing to loom. However, Tesco shares have gained over 17% so far this year and its prior results have been impressive.

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