Tesco Shares Losing Momentum as Q1 Sales Miss Expectations

Tesco shares losing momentum is not a phrase investors had much reason to use over the past five years, during which the stock more than doubled. The latest quarterly update, however, has given the market pause, and the arithmetic of the current valuation deserves a closer look.

What the Q1 Numbers Actually Show

The Q1 2024/25 trading statement showed group like-for-like sales (excluding VAT and fuel) up 1% year on year. Within that headline, total retail sales reached £15,305m, up 3.8%. The Booker wholesale arm reported sales of £2,231m, down 2.0%. The Republic of Ireland contributed £731m, up 5.1%, while Central Europe delivered £975m, up 0.9%.

The City had expected more. Citi trimmed its forecast for UK like-for-like sales growth to 2.2% from 4%, and had already expected group retail like-for-like growth of 1.4% for the quarter, against a broader market consensus of around 3.1%. The miss against consensus is the source of the wobble, not anything structurally alarming.

The comparison point is unflattering. In the full year to 28 February, a strong fourth quarter lifted group like-for-like sales to 3.5%, with the UK at 4.2% and the Republic of Ireland at 4.6%. A step-down was always likely, but the size of it relative to expectations is what the market is digesting.

Profit guidance, at least, holds firm. Tesco has maintained its full-year retail adjusted operating profit target of at least £2.8bn for 2024/25. For income-oriented investors, that floor provides some reassurance that the earnings base is not deteriorating.

Tesco Shares Losing Momentum Reflects a Valuation Problem

Strip away the short-term noise and the core question is whether TSCO’s current rating is justified. At 17 times earnings, Tesco is priced for a business with a more compelling growth narrative than a mature UK supermarket can realistically deliver. The grocery division grew faster than the 1% group headline, but still under 2%.

Tesco’s structural strengths are well-documented: the Clubcard loyalty scheme with over 20 million members, a large and established retail estate, a growing digital operation, and genuine economies of scale as the country’s largest supermarket by some distance. None of that is in question. The issue is price paid for those qualities.

A dividend yield of 3.3% sits modestly above the FTSE 100 average, but it does not compensate meaningfully for the growth constraint. The business operates in a low-margin industry with broadly stable demand. That is not a flaw; it is the category. But it does set a ceiling on what a rational forward multiple ought to look like.

Citi, for its part, characterised any share-price weakness following the Q1 miss as an enhanced buying opportunity, pointing to in-line revenues and unchanged forward guidance. That is a reasonable view if you believe the long-run earnings trajectory is intact and the Q1 miss is simply a tough-comparator effect working its way through the numbers.

The bull case, broadly, is that Tesco was genuinely undervalued three to four years ago, that the strategic refocus on core UK and European operations was the right call, and that the market is still in the process of repricing the business to reflect a better-run operation. The bear case is that the repricing is now largely complete and buyers at today’s level are paying for a story that has already played out.

Historical earnings growth at Tesco has been assisted by cost discipline and portfolio rationalisation rather than top-line expansion. Those levers are not infinitely reusable. With the UK grocery market broadly mature and Tesco’s share of it already at multi-year highs, incremental gains will be harder and more expensive to sustain.

The setup heading into the second quarter is straightforward: if Tesco can return to like-for-like growth closer to the 3%-plus territory it achieved in the prior year, the 17x multiple becomes defensible and the momentum debate fades. If the softer trend persists, the valuation will face continued pressure. The full-year profit floor of £2.8bn is the number to watch.