UBS sees Tesco building a stronger business as market share ambitions rise Proactive uses images sourced from Shutterstock
UBS has reiterated its buy rating on Tesco PLC (LSE:TSCO) with a 545p price target after a deep dive into the supermarket group’s annual report revealed what the broker described as a strong performance in a tough market.
The investment bank said Tesco invested in price, recovered gross margins and delivered efficiencies even as operating expenditure headwinds from a £228 million increase in national insurance contributions eroded EBIT margin modestly.
Gross margins rose 50 basis points in the year, driven by a decline in inventory losses as a percentage of sales to 2.0%, though this remains above the pre-pandemic level of 1.7%.
Total employee costs jumped nearly 10% to £9.5 billion, largely due to a 37% increase in social security contributions, pushing the employee cost-to-sales ratio up 50 basis points to 12.8%.
However, productivity continued to improve for a seventh consecutive year, with revenue per employee reaching £300,000, up 5.3%, while UK sales per square foot hit their highest level in eight years, up 26% compared with 2019.
UBS highlighted a significant shift in management incentives, with Tesco introducing market share as a metric in its long-term incentive plan for the first time, carrying a 10% weighting alongside adjusted diluted earnings per share and cumulative retail free cash flow at 37.5% each.
The broker said this pointed to a greater level of ambition in sustainable market share growth, noting that UK market share rose 24 basis points to 28.5%, the highest level since 2015 and a gain of 122 basis points over the past three years.
On the digital side, UBS flagged the rapid scaling of Tesco Marketplace, where weekly traffic has more than doubled and average basket spend has grown approximately 90% since launch.
Online sales rose 11.2% in the year, with online market share up 30 basis points to 35.7%.
The Finest range recorded its third consecutive year of double-digit sales growth, up 15%, while Tesco Media delivered strong growth alongside data analytics partner Dunnhumby, though no figures were disclosed.
UBS said Tesco’s partnership with Mistral AI to embed artificial intelligence across the business, particularly in Clubcard personalisation, represented a significant long-term opportunity.
The broker’s DCF-driven price target of 545p implies 17% upside from the current share price of 465p.