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Food retailer Tesco (LSE:TSCO) has outperformed the broader FTSE 100 in recent weeks, and could continue to do so. There’s only so far shoppers can cut their budgets on essential items, right?
Tesco’s share price is up 5% over the last month. But I’ve got a nasty feeling about the supermarket’s recent rally. I think investors may be underestimating the growing threat to the company’s bottom line, as we last saw when inflation spiked a few years back.
Then, sales volumes dropped as cash-strapped shoppers switched to cheaper retailers like Aldi and Lidl. Margins followed suit as the UK’s largest retailer slashed prices to defend revenues.
Could Tesco’s share price fall off a cliff in October?
Weakness appearing
It’s important to remember thatTesco has weapons in its arsenal to defend itself from these threats. Its Clubcard discount scheme gives it oceans of data it can use to better target shoppers. What’s more, the firm’s huge scale and strong supplier relationships give it excellent negotiating power it can use to keep prices low.
However, there’s only so far these tools can go to protect footfall during challenging times. And worryingly, Britain’s biggest retailer is already showing mild signs of distress.
Its like-for-like sales in the UK and Republic of Ireland rose 1.8% in the three months to May. This was well below the 4.7% increase posted in the same 2025 period. It also missed analyst forecasts by roughly half a percentage point.
A repeat performance in next month’s interims (8 October) could well send Tesco’s share price sharply lower. Especially now that its shares trade at a slight premium to historical norms. The grocer’s forward price-to-earnings (P/E) of 15.8 times sits above the 10-year average of 12-13.
Margins under threat
Right now I’m especially concerned about a serious deterioration in Tesco’s margins. For the 12 months to February, these dropped 15 basis points across its British and Irish operations to 4.7%. This followed price cuts which saw 10,000 items selling for less than they were at the start of the year.
Supermarkets’ profits margins are notoriously thin. And looking ahead, alarm bells could be ringing, not only from more likely price slashing to protect market share. Tesco could also see costs shoot through the roof as broader inflationary pressures rise, hitting margins further.
Here’s what I’m doing now
The grocer’s chief executive Ken Murphy said in June that “the conflict in the Middle East [is] creating ongoing uncertainty for many households.” With no clear end to the war in sight, this could weigh heavily on Tesco’s shares in the months ahead.
Yet as an investor myself, I’m reluctant to invest in the FTSE 100 company regardless of these near-term risks. Long-term competitive dangers continue to intensify, with Aldi today (29 September) announcing plans for another 40 new stores in 2027 alone.
With Tesco’s other rivals also expanding, the outlook for Tesco’s sales and margins is becoming increasingly challenging. If I had cash to invest today, I’d consider investing in other UK shares today, including the ones discussed below.
Should you invest £5,000 in Tesco Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco Plc made the list?
Royston Wild does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
