Tesco: Slower-Than-Expected Growth in a Cautious Environment, Maintain Fair Value Estimate

Key Morningstar Metrics for Tesco

• Fair Value Estimate
  : GBX 495
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : Medium

Tesco TSCO’s first-quarter fiscal 2027 trading statement included like-for-like sales growth of 1.8% at constant exchange rates, led by 2.6% growth in the UK and Ireland. Shares fell around 3% intraday on June 18.

Why it matters: The numbers were slightly below our expectations, with quarterly sales decelerating due to a tough prior-year comparison. Still, management is confident it can meet its fiscal 2027 operating profit target of £3.0 billlion-£3.3 billion.

• We continue to expect Tesco to meet its full-year target despite a cautious consumer environment due to ongoing uncertainty surrounding the Middle East conflict. We expect a near-term volume boost from FIFA World Cup 2026 activations, particularly for alcohol.

The bottom line: We maintain our GBX 495 per-share fair value estimate for no-moat Tesco. At current levels, shares are around 10% undervalued. While the near-term environment is cloudy, we think Tesco is well positioned to achieve its long-term targets. With this, Tesco remains our preferred pick among UK grocers.

• We expect the competitive environment to remain intense in fiscal 2027; however, we believe Tesco will maintain its grocery market share in the UK.