Is Tesco Mounting A Recovery?

Is Tesco Mounting
A Recovery?

• Tesco shares have rebounded from their recent low
• Recent sales figures look more encouraging
• Its digital investment seems to be paying off

Monday, 10th September 2012

Dear Collective Reader,

It came out of the blue, slashing nearly a quarter off the share price in one fell swoop.Tesco’s (LSE: TSCO) profit warning in January, its first for 20 years, divided investors between bulls, who saw it as a temporary glitch, and bears, who saw more serious writing on the wall.

It wasn’t just among private investors that opinions were sharply divided. Investment guru Warren Buffett rapidly upped his stake in the company to over 5%, while high-yield fund management superstar Neil Woodford took a more pessimistic view, selling out completely. Our analysts at Motley Fool Share Advisor have also been watching the business closely, as it has the sort of dominant market position we love to see.

So how is Tesco faring now?

As far as the share price goes, there has been a little recovery. Tesco shares are up about 15% since the end of May, when they briefly dipped below £3. They have also outpaced the FTSE 100 index of leading UK shares by over 10% over the last six months.

That said, at around 345p, the shares are still some 15% below the level they enjoyed in January, before the aforementioned profit warning.

Hubris

Tesco’s sin was one of hubris, perhaps not surprising in the light of former CEO Terry Leahy’s very long and successful tenure. It took its core UK grocery business for granted, and neglected it in favour of exciting growth opportunities internationally and in non-food business, from out-of-town hypermarkets to banking.

Nemesis came when the UK shopper woke up to Tesco’s poorer customer service and product offering, and its grocery market share slipped. Meanwhile, the new markets proved tough.

Internationally, Tesco lacks the market power it has at home, hypermarkets found online competition tougher than was expected, and some new domestic ventures, such as second-hand cars, were just a step too far.

Tesco’s act of repentance, unveiled by new CEO Philip Clarke in April, was to refocus investment on its core UK grocery operations. Store expansion would be cut back, while more would be spent on refurbishing existing stores, improving staffing, and in price promotions.

Trench warfare

Is it working? Competition in the UK grocery sector is rather like trench warfare. Tesco’s market share is around the 30% level, roughly double that of each of its big three rivals, Sainsbury (LSE: SBRY), Morrison (LSE: MRW) and Asda.

Tesco’s market share has continued slipping all year, but recent figures hint at a turnaround. Measured over the 12 weeks to 5 August, its market share slipped marginally to 30.9%, but in the final four weeks of that period it rose to 31.4%, according to data from Kantar Worldpanel.

In those last four weeks, sales grew 5.1%, ahead of Asda at 4.9%, Sainsbury at 2.7% and Morrison at 1.4%. It’s a very small sign but, as the company says, ‘every little helps’.

Morrison’s results last week showed how it has been struggling recently. Like-for-like sales, a key measure of underlying trading, saw a 0.9% decline over the last six months. Both Tesco and Sainsbury are due to issue their next figures on 3 October, so that will be our next opportunity to assess the state of play.

Digital expansion

One area where Tesco does seem to be stealing a march on the competition is online. It recently bought Mobcast, an online bookstore co-founded by Andy McNab of Bravo Two Zero fame. While the price paid was less than £5m, tiny in the context of Tesco’s overall business, this was the third digital acquisition in a year.

Click & Collect, essentially a drive-through grocery pick-up service, also appears to be gaining some traction, with customers seemingly finding it easier to pop in on the way back from work, rather than wait at home for a set collection window.

All this activity seems to be centred on blending the company’s online and offline presence, which appears to be winning the company plaudits from many quarters.

So, in conclusion, while it seems Tesco shareholders can expect to wait a while yet before the shares recover their previous levels, it seems to have the market and financial power to claw its way back. Nate Weisshaar, an analyst here at Motley Fool Share Advisor, agrees. He believes “Tesco still has the long-run potential for strong international growth and defence of its domestic dominance”.

From:  Motley Fool