Tesco reported a disappointing set of full-year numbers with both sales and profits falling this morning (14 April). The UK retail behemoth has faced declining consumer spending and a battle to make its big-box stores relevant. But has the company hit the bottom of its downward curve and will the group’s 2014 performance improve? Here is what the City had to say about Tesco’s performance.
“This morning Tesco reported its preliminary FY results. Sales were 1% below consensus. Trading margin was 2% above consensus led by Europe (which declined by 28%, which was less of a fall than consensus expected) and Tesco Bank. UK trading margin was at 5.0%, missing consensus (5.1%), implying that UK margins had begun to decline before the announced price cuts in February 2014… Tesco is clearly continuing to stick to – and accelerate – its plan, stating “we are accelerating our investment to deliver the most compelling offer for customers”. However there is no data that supports that the strategy is beginning to work; UK trading margin in H2 (4.9%) was below H1 (5.2%), even before the recent price investment; and like for likes are declining, with like for likes of -3% in Q4 below the -1.5% in Q3. Compare this year end results to those of Morrisons, where it talked clearly about the threat of the discounters and took the necessary decisive action.” – Bruno Monteyne, Bernstein Research
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“While these results are at the better end of market forecasts, this is a second consecutive decline in annual profits for Tesco, which, taken together with its continued fall in food & grocery market share, makes for grim reading. It faces significant challenges from a weak consumer climate and intensifying competitive pressures as from the discounters at one end of the market and the likes of Waitrose at the other. Moreover, while it has seen some uplifts from its store investment programme, the pace of its progress over the last 12 months is inevitably drawing further scrutiny on its current strategic direction.” – George Scott, Conlumino
“Whether today marks the nadir of Tesco’s fortunes remains to be seen, as the beleaguered behemoth remains under pressure. There are some glimmers of hope, with progress in the online offering worthy of note, the increasingly important convenience store offering gaining traction and the overall turnaround plan edging ahead. Despite the despair surrounding the shares, Tesco remains the UK’s largest supermarket by some considerable margin, the actual profit number is significant and, from an investment perspective, the dividend yield of 5% is attractive. However, these factors have not been enough to arrest a share price decline of 26% over the last year, during which time the wider FTSE100 has added 4%. The encroachment of the discounters in the grocery space, cut throat margins and difficult trading conditions both home and abroad have conspired to put Tesco in the full glare of the bears and the accompanying management outlook comments seem to echo that the recovery is a long term plan. The current market consensus of the supermarkets as a whole remains noncommittal and, within the sector, Tesco continues to take the brunt of investor exasperation, with the shares coming in at a sell.” – Richard Hunter, Hargreaves Lansdown Stockbrokers
“Tesco has reported financial figures for the year to February 2014 that makes for very disappointing reading for its shareholders. The business, once a shoppers’ champion and source of commendation for the United Kingdom’s business community is, under the stewardship of Chairman Sir Richard Broadbent, in a cycle of what seems to be structural decline involving a sustained period of downgrades to earnings. Indeed, despite a 25% cut to our profit and earnings forecasts for 2014/15F over the last year, we cannot yet call the end of the downgrade cycle with market share data for the first period of the 2014/15 financial year in the UK & Ireland at least suggesting especially weak trading (the Thai market is also very challenging). We have few reasons to believe that trading in these core markets for Tesco, even adjusting for the late Easter, will materially improve soon, leading us to flag up to investors the probability that we may be further reducing our forecasts for the financial year on a precautionary basis. To stem the tide of downgrades Tesco has a board that currently comprises one executive, CEO Philip Clarke. Whilst we are not investors, as opposed to commentators to the company, we cannot hide our disbelief that there has been no succession planning for the replacement of Mr. Clarke’s CFO, Laurie McIlwee, whose resignation was announced on the 4th April. Accordingly, with an executive board of one person, we assert that shareholders can only look to the non-executive directors as the source of responsibility for the group’s current plight to our minds. Hence, we repeat our belief that a newly constructed board is necessary to take Tesco forward with a more conventional balance between executive and NEDs; the present structure and performance does not reflect well upon Tesco’s chairman in our view” – Darren Shirley, Shore Capital
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