Has Tesco had its time?

18th 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?


More on Mindful Money:

Diageo and GlaxoSmithKline: When debt is good for investors

M&S Bank – Brand diversification too far?

Nokia – an investment opportunity for someone else

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The Financialist

14 thoughts on “Has Tesco had its time?”

  1. forbin says:

    hello shaun,

    something bad coming through ??

    media seems mired in the HS2 debarcle !


    1. Anonymous says:

      Hi Forbin
      True but now they have our increased involvement in Mali to distract them too. Sending troops as “advisors” what could go wrong?

  2. John says:

    Can the general society in Spain remain stable with this level of austerity? It beggars belief that a country’s politicians are willing to impose this level of hardship on their own population.

    As time passes, I assume the temporarily inoperative factories become harder to bring back into service. Simply re-hiring staff will not be enough, industrial capability will need to be rebuilt from the ground up – expensive and time consuming!

    Are there any figures for the losses from now inactive plant and estimates of how this will rise over the next few years?

    What will happen when these loses hit the banks’ balance sheets?
    Are UK banks exposed to any significant extent in Spain?

    1. forbin says:

      “beggars belief that a country’s politicians are willing to impose this level of hardship on their own population.”

      that is because the Banks are in charge – not politicians – haven’t you noticed?

      Here or in Spain


      1. John says:

        so much for democracy! But yes, I had noticed. The politicians are frontmen for them, but I would prefer to see them stand up against the banks. The banks seem to want to take every penny they can and control the rest. Politicians are there to ensure that this doesn’t happen and they are failing. At some point there will be an explosion and all will be damaged.

    2. Anonymous says:

      The problem with Spain (etc) is that the statistics bear no resemblance to reality. On the one hand, they say that their overall unemployment is 26% or so, with more than half of young people on the dole, but on the other the government mentions that the ‘informal’ economy is about a quarter of the total. I do find this confusing – but it might explain why there has been little protest so far.

    3. Anonymous says:

      Spain’s output decline is caused by reduced apartment building not industrial decline. Spanish politicians have little choice because of reduced tax revenues.

      Please suggest an alternative to Spain’s austerity – and detail where the extra money might come from.

  3. Pavlaki says:

    One day the retail decline will bottom out – only because it has to if people are to buy clothes and eat. Just watch the Eurocrats crow that when it does that this is a sign of improvement!!! No doubt the Euro will rise on the back of it. There seems to be a positive knee jerk reaction to any news out of the Euro zone that isn’t catastrophic. They have done a magnificent job of spinning the best news from a bad case and Britain should do more of it. We, on the other hand, always appear ready to snatch defeat from the jaws of victory when it comes to economic news.

    1. Anonymous says:

      Hi Pavlaki

      Whilst you are right that one day the decline in retail sales will bottom out the evidence from Greece is that so far that has not been found in spite of calamitous falls. Even after them we in fact saw an acceleration in the rate of fall in October to -18.1% there.

      As to the Euro it is just on the edge of US $1.35 as I type this so the beat of the rally goes on…

  4. Pavlaki says:

    We are often told that Euro zone countries have had successful bond sales – but it pays to look carefully at who is buying the bonds. In Spain they have used over 90% of their state pension fund (65 bil Euros approx) to buy government bonds as this does not add to official debt levels. What happens when this is all used up?

    1. Anonymous says:

      Or even some of it. Clearly a state pension fund is supposed to be for state pensions. Pensioners could reasonably ask where their pensions will be coming from. Presumably the government thinks it can tax and borrow its way out of this problem – Ho!

  5. Postkey says:

    Do you think T. Congdon has the ‘solution’?

  6. max says:

    Shaun, On the bright side, at some point when we get to the bottom of the spanish housing market we londoners will have to move to Spain. With all the QE in London and foreigners buying up everything, it is impossible to afford anything here!!

    Redevelop Battersea power station?? Why not sell it all to foreigners? Great idea.

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