Tesco’s UK sales growth highest in three years

Tesco’s UK sales growth highest in three years
Published: 2013/01/11


LONDON: Britain’s Tesco plc said its £1 billion (RM4.86 billion) turnaround plan for its home market was starting to work as it posted its highest sales growth in three years over the Christmas period.

Tesco, the world’s third-largest retailer, beat forecasts for underlying sales growth, regaining an edge after a dismal Christmas in 2011 prompted the group’s first profit warning in 20 years and a strategic rethink.

Sales at British stores open more than a year, excluding fuel and VAT sales tax, grew 1.8 per cent in the six weeks to January 5, part of Tesco’s fiscal fourth quarter, compared with analysts’ forecasts in a range of up 0.5 to 1.5 per cent and with a third-quarter fall of 0.6 per cent. Reuters





http://www.fool.com/investing/international/2013/01/09/whats-in-store-for-tescos-shareholders.aspx

Analyzing Retail Stocks - Economics of the business, and what it means for investors

In this post, the nature of retailing and the key factors that affect a retailer's health is described. It broadly forms the base of the investment thought process for investments in retailers.

The nature of the retail business

and the fundamental drivers of success

The retail business is a tough one, and very few retailers succeed in building enduring businesses. The retail landscape has changed tremendously over the last few decades. Fast food restaurants have replaced Automats, and big box retailers have risen to prominence at the expense of high-street/city center retailers. Retailers have to adapt to changes in fashion, lifestyles and consumers tastes. Large established retailers that fail to adapt can fall swiftly; witness how bellwethers like Sears, K-Mart and Circuit City have gone from boom to bust in a matter of years.

Retailers are fundamentally in the business of distribution. They create value by getting products to consumers, in a manner accessible to them when they need it. For a retailer to be successful, it needs to:

1. Stock products that customers intrinsically want.Retailers are rarely able to generate intrinsic demand for a product. The intrinsic demand for a product is determined by a combination of product marketing, consumer lifestyles and the prevailing zeitgeist. What retailers do is to meet that demand by making the products available to consumers. Retailer merchandising and presentation play an important role in stimulating the desire to purchase a product, but they only work if the customer has a fundamental need/demand for the product.For example, it's unlikely a retailer will succeed in selling chicken feed in New York city, no matter how creatively the product is merchandised. 

Retailers can either create their own items to stock (such as retailers like the Body Shop, or the general provisioners of the early 1900s who sold brand-less commodity items), or stock items made by other companies, as long the products are what people desire and fit into the position and mind share occupied by the retailer. FMCG companies add value for the retailer by supplying them with products that their customers want, at a lower cost and with less hassle than having to develop the products themselves. This symbiotry between FMCG companies and retailers has evolved over the years, since it started in the late 1800s when P&G, Colgate and other FMCG companies were founded.

Retailers need to adjust their merchandise mix over time as tastes and needs change over time. Products that are considered necessities today may become irrelevant in a decade, and products that people aspire to change over time. Many retailers fail because they do not keep up with lifestyle and zeitgeist changes.

2. Make it convenient for consumers to buy. Because people generally do not derive value from the buying process; they see it as something they have to go through to get to the value that products deliver (e.g. refreshment from a drink, the cleaning power of a soap, etc.). People tend to buy from the store that is the most convenient to buy from. 

What about people who enjoy shopping? While it's true that they derive value from the shopping activity, the actual purchasing process is not something they would place much value on. Their shopping expeditions will generally be to places which are convenient, being both accessible and a one-stop destination for the merchandise being sought. So making it convenient for consumers to buy is key to successful retailing. To do this, retailers must:

• (a) be accessible in the context of its customers' lifestyles. People will only visit stores that are conveniently accessible to them. The only exception is when a store sells something that a person has become addicted to or induces a strong physiological response, such as pornography and addictive items.
  
  For example, malls and big box stores fit the car-centric lifestyle of suburban shoppers in the U.S. Big box grocers find it harder to succeed in Japan because many people there do not drive, and also have small fridges which cannot store a week's worth of shopping. Instead, convenience stores scattered amidst the urban alleys are more suited to the Japanese lifestyle, because most Japanese consumers walk to subway stations on their way to and from work.
  
  The way people shop changes with changes in their lifestyle, which is typically driven by technological advances and changes in the zeitgeist. For example mail order used to be a convenient way to buy things, but is today rarely used as (1) people are more mobile and able to travel to stores easily, (2) modern logistics networks bring all kinds of goods to local stores, obviating the need to buy from a faraway mail-order retailer, and (3) the prevalence of Internet shopping, which has made mail order less relevant (though not extinct - for example, NBrown in the UK still runs a large home shopping operation)
• (b) be a one-stop shop for the position that it has carved out in people's minds. Each retailer has a position in the customer's mind (for example, a store to buy "natural remedies" or "imported groceries" or "stuff at bargain prices"), and the merchandise mix in the store must support that position. When a customer walks into a store, he/she should be able to find all the items that he/she is looking for. A successful shopping trip reinforces the retailer's position in the customer's mind, while a wasted shopping trip makes it more likely that he will choose another store in future. No amount of positioning marketing will help if the store doesn't have the range of goods a customer looks for.

The economics of the retail business
and sources of competitive advantage

The economics of the retail business are similar to that of the distribution business. Both are a combination of a logistics network and a trading business (inventory management). Like distributors, retailers are price-takers when there are multiple competitors serving the same target customers. On the other extreme, a dominant retailer in a town enjoys a natural moat that gives it pricing power. This does not mean that a retailer's pricing power grows with size, rather there is a tipping point between the two extremes.

• A retailer generally has no price-setting power when there is a competitor serving the same group of customers. (i.e. targeting the same customer profile, and present the same assortment of goods at the same locations/customer touch points). The economics of the distribution business are such that a customer faced with the choice of buying from 2 or more distributors will not be willing to pay much more for one distributor's services as opposed to another. Certainly some people may be willing to pay more to visit a cleaner/less crowded store, but the premium they are willing to pay is minimal. The players are price-takers, and the only sustainable competitive advantage is to be the lowest cost operator within its market. Having the lowest cost of operations and procurement allows the retailer to match all competitor price actions while remaining profitable.
• However a retailer has price-setting power if no other retailer is serving the same group of customers. For example, if a grocery store is the only one that is accessible to the residents of a town, then the retailer can generally set the prices for its services. Likewise, the only store to sell specialty cheeses in a city can set the price for its services.

Size is a source of competitive advantage. All things being equal, the economics of retail are such that the value that a retailer brings to customers increases naturally in proportion to the size of its operations. The largest retailer will almost by definition (a) be the most accessible to customers with the best network of sites by virtue of the in-place nature of the business, and (b) have the widest range of goods. The economies of scale that exist in distribution means that the largest distributor is also likely to have the lowest unit costs, and thus able to offer the lowest prices in order to fend off competitors who try to compete on price.

The largest enjoys a positive feedback loop where its increasing size improves its competitive position, which in turn increases it size, and so on. Once a dominant position is achieved, the economics of distribution gives the retailer a structural competitive advantage and makes it very difficult for smaller competitors in the same category to compete.

This doesn't mean that no other retailer competitor will survive, because consumers don't just base their buying decisions on these factors; there will be people who prefer the competitor's store because of its color scheme, etc. (This applies less to distributors who sell to businesses, because business buyers tend to make economical decisions. Take for example, the different buying behavior between consumers and fleet-buyers when they buy cars. The former will be influenced by styling, while the latter will be driven by fuel efficiency and maintenance costs.)

Building an enduring long-term retail business
with a sustainable competitive advantage

The economics of the business means an enduring retail business is one that is able deliver value to its customer and achieve and retain dominance. This means that an enduring retailer is one that is able to:

(1) Constantly adjust its inventory to continuing stocking products that its customers want, and adjusting its mindshare position in its customers' minds accordingly. (or it could try selling products that are relatively insulated from fashion trends and quick changes in demand)

(2) Constantly adjust it store accessibility, to be accessible even when its customer's lifestyles change. (or it could be serving a consumer group whose lifestyle that isn't expected to change much)

(3) Achieve the lowest cost of operations. In the retail business, this means:

• (a) Maximizing inventory turns. Moving inventory as quickly and efficiently as possible. Fast moving inventory also allows the retailer to reduce the capital intensity of the business, and increases the flexibility to quickly change stock when customer needs change. Conversely, slow moving inventory means that capital is tied up (and financing costs incurred), and also prevents the retailer from purchasing new stock to cater to seasonal or changing customer demands.
• (b) Maximizing sales per square foot. A higher sales intensity increases capital efficiency and productivity. Per unit operating costs are also reduced through the efficiencies gained from selling more in a single location.
• (c) Maximizing economies of scale. This is a business where there are economies of scale. A retailer that has higher purchasing volume will be able to extract more price concessions from its suppliers. Likewise, higher merchandise volume means that the retailers logistics and distribution infrastructure will be better utilized. For example, trucks will travel with full loads, and the fixed costs like warehouse management systems will be amortized a larger volume of merchandise.

Openings that an upstart competitor can exploit
to displace a dominant retailer

The competitive landscape of retail is like an open savannah, where the playing field is flat with few natural defensive positions. The factors of production, technology and merchandise used in retail are available to all competitors. Likewise consumers can switch retailers easily, and lifestyle and fashion changes affect all retailers. A competitive retail landscape is like a highly evolved Savannah ecosystem, where individual players have carved out their own survival space (value to customer, delivery model etc), and their incumbency is evidence of their competitive strength within a niche. In other words, they will likely have found the best way of utilizing existing factors production for a particular customer niche. The more competition the incumbents have defeated, the less likely it is that there are unexploited factors that the incumbent has overlooked.

In this landscape, competitors can establish a survival space only if one of the following openings exist:

(a) They ride a changing consumer wave or change in zeitgeist. In other words, exploit a changing customer profile which the incumbent isn't attuned to. For example, Sears used to be the dominant retailer in the United States, but the rise of suburbia, the auto-culture and changes in tastes allowed big-box stores and category killers to muscle in on Sears' dominance.

(b) They find some technology or operating technique which the incumbents have overlooked. This is difficult, but not impossible. Walmart did just that to K-mart, by exploiting the logistics efficiencies of building store in geographically contiguous fashion. It built out its network of stores in small towns by going into towns next to each other. This logistics efficiency allowed it to achieve lower costs that the incumbent discounter K-Mart, which had store that were situated in big cities hundreds of miles apart.

(c) The incumbent messes up. The dominant retailer may also mess up, for example, by allowing its store to be infested by rats. Dominant retailers can also the mistake of muddying its position and deviating from the formula that made it successful. For example, a retailer with the position of lowest-cost discounter may try to become an aspirational retailer that sells higher-end goods. Because of the Savannah like competitive landscape, deviating from a survival space means that a retailer is exposing itself to open competition from other players who have already found the competitive advantage in their survival space. The dominance in one survival space often does not translate to another survival space, and the retailer will be starting from zero in its competitor's stronghold. This doesn't mean that a grocery discounter will be unsuccessful selling discount electronics, because the competitive dynamics of both areas are similar. But a discount grocer trying to sell fashionable clothes is going to find it tough going, because the survival dynamics in each space are vastly different.

What this means for Investors
who invest in retail companies

Investing in retailers involves a quantitative assessment of the retailer's cost position and dominance, and a qualitative assessment of whether its position, customer base, and accessibility to its customers are likely to continue relative to zeitgeist and technological changes. It basically means:

1. identifying retailers that have established strong survival spaces, and
2. constantly monitoring the landscape for evidence of competitive openings that may have been created, and
3. constantly monitoring the changes in consumers' lifestyles and evidence that the retailer is keeping up with these changes

It is more than a simple spreadsheet exercise, unless we are planning to liquidate the retailer for its assets.

http://www.ventureoutlook.com/2009/07/investing-in-retail-stocks-business-and.html
SUNDAY, JULY 19, 2009

Tesco: A FTSE 100 Dividend-Raising Star

By Kevin Godbold
October 19, 2012 

LONDON -- In an outcome that's tough on investors, the FTSE 100 has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF, for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year	2007	2008	2009	2010	2011
Dividend per share (in pence)	19.1	20.2	17.1	16.2	18.1

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Tesco(LSE: TSCO.L  ) (NASDAQOTH: TSCDY.PK)

The big question is: Can the company's dividend continue to outperform its index? Let's take a closer look.

Tesco owns the U.K.'s largest supermarket chain and is expanding abroad as well. With the shares at 322 pence, the market cap is 25.8 billion pounds. This table summarizes the firm's recent financial performance:

Trading Year	2007	2008	2009	2010	2011
Revenue (in millions of pounds)	47,298	53,898	56,910	60,455	64,539
Net cash from operations (in millions of pounds)	3343	3960	4745	4239	4408
Diluted earnings per share (in pence)	26.61	26.96	29.19	34.25	36.64
Dividend per share (in pence)	10.9	11.96	13.05	14.46	14.76

So, the dividend has increased by 35% during the last five years -- equivalent to a 7.9%compound annual growth rate.

Tesco describes itself as one of the world's largest retailers with operations in 14 countries and employing more than 500,000 people. In the U.K., it is the country's largest retailer. Britain is important to Tesco as it currently accounts for two thirds of global sales. That's why the shares fell when profits slipped recently, and the directors admitted that the U.K. store portfolio had suffered from under-investment, thanks to the pursuit of international growth. There's evidence to suggest where investment has gone in the statistic that two-thirds of Tesco's selling space is overseas. So the majority of stores are abroad despite foreign sales only contributing one third of revenues.

Right now, the directors have firmly re-focused on the core U.K. market, and a domestic investment program is under way. Tesco has some catching up to do at home, but I'm with those that think it can achieve that and go on to grow international sales and profits. If the company pulls off that double whammy, there's potential cheer for those using the current share price setback to lock in a decent dividend yield, as the progressive dividend policycontinues.

Tesco's dividend growth scoreI analyze four different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: the recent dividend was covered around 2.5 times by earnings. 4/5
2. Net cash or debt: net gearing just over 50% with debt around 2.5 times earnings. 3/5
3. Cash flow: historically, good cash support for profits. 4/5
4. Outlook and recent trading: earnings down in recent trading and the outlook is flat.3/5

Overall, I score Tesco 14 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.

Foolish summaryCash flow is backing profits, and debt appears to be under control. The short-term outlook may be flat but it's hard to see Tesco's domestic investment failing. To me, the progressive dividend policy looks secure.

Right now, the forecast full-year dividend is 15.26 pence per share, which supports a possible income of 4.7%. That looks attractive to me.

Tesco is one of several dividend out-performers on the London stock exchange. 

http://www.fool.com/investing/international/2012/10/19/tesco-a-ftse-100-dividend-raising-star.aspx

How Long Will It Take Tesco to Recover?

By G. A. Chester | More Articles 
October 16, 2012 | Comments (1)

LONDON -- Top U.K. supermarket Tesco (LSE: TSCO.L  ) shocked the market back in January with its first profit warning in 20 years. The FTSE 100 firm saw almost 5 billion pounds wiped off the value of its shares at a stroke.

Nine months on, and a disappointing set of interim results later -- a double-digit percentage fall in trading profit -- Tesco's shares languish at the same level they dived to immediately following the profit warning.

So, how long will it take Tesco to recover? Let's have a look at three other supermarkets that have issued profit warnings in the past 10 years.

Morrison's meal deal: four years of indigestionIn March 2004, Wm Morrison Supermarkets completed the 3.4 billion pound acquisition of rival chain Safeway. Within six months, it issued a profit warning for its fiscal year 2005 -- the chain's first profit warning in 37 years.

By June 2005, Morrison had issued no less than five profit warnings, extending the fallout from the acquisition into fiscal year 2006. As the table below shows, it would take until 2008 for Morrison's earnings per share to surpass its pre-profit-warning level of 2004.

	2004	2005	2006	2007	2008
Revenue (in billions of pounds)	4.9	12.1	12.1	12.5	13.0
EPS (in pence)	12.6	8.1	(9.5)	9.3	20.8
Dividend per share (in pence)	3.3	3.7	3.7	4.0	4.8

Of course, Morrison's bout of severe indigestion from feasting on Safeway is very different to Tesco's current situation.

However, there are perhaps a couple of points worth noting. On the optimistic side, Morrison was able to maintain its dividend despite its difficulties. On the pessimistic side, analysts remained over-optimistic about Morrison's earnings, not only after the first profit warning but also through the following 12 months.

Sainsbury's six years of hurt

J Sainsbury issued three profit warnings for its fiscal year 2005. The company had been chasing higher margins at the expense of the customer experience. Sound familiar?

Sainsbury's directorspeak and actions to remedy the situation in 2004-05 also reverberate in many ways with Tesco's in 2012. Here are some pertinent snippets from Sainsbury:

There is nothing fundamentally wrong with the brand. The problem was that we hadn't delivered it well enough in recent years.

Our number one priority … to make things better for our customers as quickly as possible … to "fix the basics."

Recruitment of 3,000 additional colleagues into stores.

131 stores have not received any investment for a number of years … Customers, representing 20 percent of Sainsbury's sales, are not experiencing the best store environment and these stores will be refurbished over the next two years.

Overall, we think we've made a good start, but there's still much left to be done.

As the table below shows, there was indeed much left to be done.

	2004	2005	2006	2007	2008	2009	2010
Revenue (in billions of pounds)	18.2	16.6	16.1	17.2	17.8	18.9	20.0
EPS (in pence)	20.7	-3.0	3.8	19.2	19.1	16.6	32.1
Dividend per share (in pence)	15.7	7.8	8.0	9.8	12.0	13.2	14.2

Sainsbury had reckoned it would take until fiscal year 2008 to bring about lasting change. As far as earnings performance was concerned, it took until 2010 for EPS to surpass its pre-profit-warning level of 2004. Meanwhile, the dividend, which was slashed in 2005, had yet to regain its former level.

Carrefour on all fours: five years and countingFrench supermarket giant Carrefour has similar revenues to Tesco and, like its U.K. counterpart, is the dominant force in its home territory.

Carrefour issued a profit warning in June 2008 and a second six months later, citing weaker consumer spending, particularly in Europe. An uptick in revenues and earnings in 2010 proved to be a false dawn and the company issued five profit warnings for its fiscal year 2011.

As the table below shows, an improvement is expected in the current year. Nevertheless, the dividend has been cut, and both EPS and dividend per share are forecast to be at around half their pre-profit-warning level of 2007.

	2007	2008	2009	2010	2011	2012 (forecast)
Revenue (in billions of euros)	82.1	87.0	87.4	91.5	80.5	80.8
EPS (c)	267	186	48	64	56	134
Dividend per share (c)	108	108	108	108	108	59

Foolish bottom lineIt took four years for Morrison to get its EPS back to the level before the first profit warning; it took Sainsbury six years; and for Carrefour it's five years and counting.

Tesco may pull a quick-turnaround rabbit out of the hat, but if recent supermarket history is any guide, it could be a longer and rougher ride than I suspect many investors are expecting.

Certainly, Tesco's problems amount to a whole lot more than one period of poor Christmas trading. In the words of the chief executive, the company needs to address "long-standing business issues" in the U.K.

Once on the wrong tack, supermarkets, like supertankers, typically take an age to change course. Tesco's shares may be trading at under 10 times current-year earnings forecasts and offer a prospective yield of 4.8%, but investors need to consider the opportunity cost of a protracted recovery.

One super-investor who is aboard the Tesco supertanker for the long haul is US multi-billionaire Warren Buffett. You can read the full story of Buffet's investment in a free and exclusive Motley Fool report: "The One UK Share Warren Buffett Loves."

http://www.fool.com/investing/international/2012/10/16/how-long-will-it-take-tesco-to-recover.aspx