Tesco’s stock has experienced significant growth this year, surging approximately 25% as investors responded positively to rising sales, increased profits, and stock buybacks. But do Tesco shares still represent a worthwhile investment opportunity?

For nearly a decade, shares in the UK’s largest grocery retailer have fluctuated dramatically, largely affected by an accounting scandal in 2014. However, under Ken Murphy’s leadership over the past two years, the stock has seen a remarkable revaluation.

Since taking the helm during the pandemic in 2020, Murphy has implemented a comprehensive strategy that comprises four main pillars: prioritizing value, enhancing loyalty programs, ensuring customer convenience, and optimizing operational efficiency. This approach has paid off, enabling Tesco to capture 27.8% of the grocery market share by lowering prices on thousands of items, attracting a larger customer base, and boosting sales. This strategy proved particularly effective amid the cost of living crisis, significantly aided by the success of its Clubcard loyalty initiative.

As a result, Tesco reported a 13% increase in operating profit, totaling £1.61 billion for the first half of this financial year, up from £1.43 billion during the same period last year, while exceeding analyst forecasts by 7%. Additionally, sales climbed by 3.5% to £31.5 billion, with like-for-like sales rising by 2.9%.

Murphy also indicated that customers are financially stable ahead of the vital Christmas season, with many already beginning to invest in higher-priced items as early as October. This prompted Tesco to upgrade its profit expectations for the year to approximately £2.9 billion, up from a prior estimate of at least £2.8 billion.

A particularly bright spot this year has been the growth in sales of premium products, with the Tesco Finest range experiencing a 15% increase in sales volume during the first half of the financial year compared to the previous year.

Looking ahead, Tesco is gearing up to relaunch its F&F clothing line online next year to meet the rising demand for affordable apparel. However, this move raises concerns, especially considering that rivals like Sainsbury’s have struggled in the clothing sector, opting to replace some clothing space with food aisles due to lagging fashion sales. Meanwhile, Asda’s clothing line, George, reported a 3.9% decline in like-for-like sales in the second quarter.

Despite these concerns, Tesco’s overall outlook appears robust, characterized by strong sales, impressive profits, and a 30-basis-point improvement in adjusted operating profit margin to 4.5% in its retail sector. The company also boasts a healthier balance sheet, with net debt decreasing by £212 million to £9.68 billion during the first half, representing a net debt to adjusted cash profit ratio of 2.1, comfortably below its target range of 2.3 to 2.8.

With a substantial amount of cash available for potential shareholder returns, Tesco’s retail free cash flow (excluding Tesco Bank) is projected to be between £1.4 billion and £1.8 billion by year-end. The stock is anticipated to yield around 3.9% over the next year, aligning with the broader FTSE 100 index.

Since mid-April, Tesco shares have achieved a remarkable total return of 35%, when they were previously rated a buy at a forward price to earnings ratio of just 12, one of the lowest in a decade. While this share price increase has nudged the ratio up to 13.6, it remains significantly lower than the 10-year average of 17.3. Given its extensive scale, market leadership, and continued growth, Tesco’s stock appears to be in a favorable position worth considering. Recommendation: Buy due to an appealing valuation relative to strong market performance and growth potential.

Halfords Analysis

Halfords saw a surge in popularity during the pandemic, driven by the cycling boom, but it now faces challenges, including a market slowdown, diminished consumer spending, inclement weather, and rising costs. Nevertheless, analysts suggest the stock could yield around 5% over the coming year, making it a potential investment worth consideration.

This retailer specializes in products and services for both motorists and cyclists and has been adversely affected by the financial consequences of upcoming national insurance and minimum wage increases. With 377 retail outlets and 550 garages, the company employs over 12,000 individuals.

While Halfords has not provided specific details on how increased costs will impact customers, preliminary estimates indicate that direct labor costs could rise by £23 million, with only about £9 million already accounted for in its financial plan for 2025-26.

The company’s financial performance has not been stellar, with a 1% decline in revenue during the first half, dropping from £873.5 million to £864.8 million for the six months ending September 27. Pre-tax profits also fell by 23.3% to £17.8 million, prompting CEO Graham Stapleton to express concerns over an “uncertain” trading outlook in a recent report.

There is some optimism surrounding certain initiatives at Halfords, including its loyalty motoring club, which now boasts over four million members, and the expansion of its Fusion centers integrating in-store and garage services. Current market forecasts suggest that Halfords could yield 5% in the next year, outperforming the wider FTSE All Share index, which sits at 3.9%.

However, since this column suggested avoiding Halfords in November of last year, shares have plummeted 29%. At that time, a potential takeover offer appeared to be the most promising avenue for investors eagerly awaiting a rebound. Today, with shares trading around 150p, there remains little evidence of recovery in either the cycling or tire segments. Recommendation: Avoid due to a challenging outlook in its core market.