Has Tesco had its time?
- 18 June 2012
But is the tide turning for the stock that's been considered safe investments for troubled times?
Latest news is that Tesco is moving into internet radio by buying digital music operation WE7 for £10.8million, so it continues to innovate, but its poor results have also made headlines.
This week saw Sainsbury release its quarterly figures – and they outshone Tesco. The UK's largest retailer revealed that like-for-like sales, excluding both VAT and petrol, dropped, while international sales slowed in the 13 weeks to May 26.
Though the company described its performance as "good sales performance in a challenging market", the punters weren't overjoyed, and the share price fell.
Many say that innovation is the path to the regeneration of the UK economy, and Tesco has been among the most innovative retailers and should be reaping the benefits. It was the first to introduce club-cards; it created International Sourcing and expanded into non-food products in its out-of-town stores.
Even so, some say its sliding results shouldn't come as a huge surprise.
Phil Oakley says in Money Week: "For the last five years an investment in a UK food retailer has hardly been stellar. Yes, profits and dividends have grown, but share prices have gone nowhere. In fact, Sainsbury's shares have nearly halved and Tesco's are down by a third, while Morrisons' have basically marked time."
Of course, consumer confidence is low and sales might not be rising at present. But can it recover?
Are the billions of pounds that they intend to spend on existing stores and on opening new ones over the next few years really going to give their shareholders a decent bang for their buck?
Oakley says: "Most urban areas are saturated with supermarkets. We don't need any more. Add in the fact that shoppers are not maxing out their credit cards any longer and you have to wonder: how are all these stores going to make acceptable profits, never mind grow them?"
But is there potential for a profits upswing?
The three quoted supermarket operators seem to be stuck between a rock and a hard place. They neither offer really cheap prices like Aldi or Lidl, nor the perceived quality of a Waitrose or Marks & Spencer.
Phil Dorrell, a director at retail consultants Retail Remedy, says in the Daily Telegraph: "After the terrible performance last year and saying they would throw the kitchen sink at it to improve things, we expected to see far stronger numbers from Tesco.
"Tesco is treading water but the paucity of its long-term marketing strategy could still drag it under. Tesco… continues to offer a bland and soulless shopping experience and will be hard pushed to maintain its market share over this financial year. The leadership still seems to be focused on the quick fixes, more appropriate to running a store than a business.
"Despite the clear and numerous issues, Tesco is a fantastically successful business and its problems can be solved. With its ubiquitous presence in the UK, not to mention ambition and ferocity, it can quickly hurt every other retailer once it gets back on track. It's a matter of when and under what leadership."
The company been growing profitably for the past decade and has increased revenue, earnings and dividends on a per share basis in every single one of those years.
That's a pretty amazing track record and one that very few companies anywhere in the world can match.
John Kingham, author of the popular blog UK Value Investor, says in a Mindful Money post: "It also appears to have an aversion to excessive debt even though they are in a very stable industry and could probably borrow far more than they currently do. Debt interest payments are covered around 11 times by earnings and total borrowings are only about 3 times operating profits. Both of those figures are relatively conservative and in no way excessive."
The question of Tesco's future is the most important question of all, however it's one that can only be guessed at. Despite the media backlash, it is not obvious that the company's current problems will have a meaningful impact on its long-term ability to generate cash, earnings and dividends.
Is Tesco as big as it can get? Or will you follow the Sage of Omaha and pop its stock in your portfolio?
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