The Tesco (LSE:TSCO) share price jumped last week on the back of some fairly promising earnings numbers. The recent 6% boost has elevated its 12-month performance to just under 28%. So what exactly has got investors excited? And should I be considering this business for my portfolio?
The Tesco share price rises on interim results
Looking at the recently-published six-month earnings report, Tesco has made some significant steps forward. Revenue, excluding VAT and fuel sales, only grew a measly 2.5% from £26.7bn in 2020 to £27.3bn. However, thanks to lower Covid-19-related expenses, operating profits were through the roof for the supermarket.
The underlying income came in at £1.5bn, versus £1.2bn a year ago. This 40% surge was predominantly facilitated by higher retail profits. But it’s worth noting that Tesco Bank also managed to generate a £72m profit over the last six months. As a reminder, this segment generated a loss of £155m in 2020. The improvements in margins have also resulted in retail free cash flow to nearly double, allowing for net debt to fall by £2.3bn.
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I think it’s fair to say this is quite an impressive report. And it would seem the management team agree as it’s just announced a £500m share buyback programme, due to be completed by October 2022. Needless to say, this is excellent news for the Tesco share price.
Slowdown on the horizon?
As encouraging as this latest report is, there’s a looming threat to the recently-improved margins. It’s no secret that the UK is currently in the middle of a lorry driver shortage. In fact, this is what led to the recent lack of fuel in petrol stations around the country.
Even if Tesco can retain its team of drivers, the margins will still be impacted by the rising fuel prices caused by the ongoing shortage. And despite the recent efforts of the UK government, this problem may persist for quite a while.
With the cost of transportation going up, Tesco’s might be forced to raise in-store prices to maintain margins. However, these higher prices may, in turn, push consumers away from Tesco and towards discount retailers such as Aldi and Lidl in an attempt to save money.
Depending on the severity of the impact of this situation, Tesco’s profits could end up tumbling significantly in the second half of 2021. Only time will tell. But if the recent growth in operating profits were to reverse, I wouldn’t be surprised to see the Tesco share price fall with it.
The bottom line
All things considered, Tesco looks like it’s in a strong position. While the driver shortage is concerning, I believe the problem will most likely be resolved within the next 12 months. To me, that makes it a short-term issue.
Therefore, despite the risk of volatility, I think the Tesco share price can continue to climb over the long term. That’s why I’m considering adding it to my personal portfolio.
