Tesco share price forecast: unprecedented margin contraction expected

Tesco (LON: TSCO) share price dropped sharply on Friday as concerns about the company’s margins and growth remained. The stock retreated to a low of 269p, which was the lowest level since March this year. 

Margin contraction

Tesco is the biggest retailer in the United Kingdom with thousands of workers. As a result of its size, the company managed to handle the supply chain challenges better than most retailers. 

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However, the company has not been immune to the ongoing challenges. On Thursday, the company said that it would boost salaries of its employees by about 6% as the labour shortage continued.

The announcement came shortly after Sainsbury also decided to boost wages by a similar amount to $14.43 per hour. Tesco will now pay its hourly workers $13.21. 

While the pay rise is a good thing for employees, investors believe that it will affect the company’s margins considering that the cost of buying other items is also rising. The latest data by the Office of National Statistics showed that the country’s inflation rose to the highest level in decades. 

Another concern for the Tesco share price is that the rising inflation will reduce the amount of goods that people buy in its stores. Indeed, data by ONS showed that retail sales declined sharply in January and February. 

Therefore, the coming week will be important for the company as it is set to publish its preliminary results for 2021/2022 year. The management will also provide more information about the company’s growth and impacts on the rising cost. 

Tesco share price forecast 

Tesco share price has been in a downward trend in the past few months. It has fallen by more than 11.40% from its highest level this year, meaning that it is in a correction. The stock has moved below the 25-day and 50-day moving averages, signaling that sellers are in control. 

Tesco shares have also dropped below the lower side of the bearish flag pattern that is shown in purple. Historically, the pattern is usually a sign that a bearish trend will continue. 

Therefore, while Tesco is a good stock to invest in, there is a likelihood that the share price will keep falling in the coming months. If this happens, the next key support level to watch will be at 250p.

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