Neil Woodford: Why I Sold Tesco

Published in Investing on 16 April 2012

The City super-investor explains why he no longer holds the supermarket.

Neil Woodford has revealed why he sold all of his shares in Tesco (LSE: TSCO), despite admitting some reservations with the price trading at a "distressed" valuation.

Mr Woodford, who is possibly the City's most successful fund manager, owned about 167 million Tesco shares before the sale, which at the time represented about 3.4% of his market-thumping Invesco Perpetual Income and High Income funds.

Writing in the Telegraph, Mr Woodford said he placed too much confidence in the business's ability to cope with the economic headwinds:

"Until recently, I believed that food retailers such as Tesco would prove more resilient to the travails of the UK consumer than those that were more reliant on discretionary spending, but Tesco's Christmas trading update earlier this year changed my mind".

"However Tesco's problems are not just down to the difficult consumer environment and with the benefit of hindsight it is evident some of the company's investment decisions in recent years have not created the value that they should have -- or not yet at least."

In January's trading update, Tesco revealed a poor Christmas period and acknowledged rising costs, a move that sparked a 16% share-price fall.

The profit warning, reportedly Tesco's first for at least two decades, spooked the market and investors who backed the stock in the belief food retailers would be a defensive play in the volatile markets.

Mr Woodford explained: "Moves into non-food merchandise and building much bigger stores to cope with an expanding product range seem to have contributed to Tesco's current issues, lessening its defensive qualities."

"Investments overseas in areas such as the US, India and China, have not yet fulfilled their potential or enhanced shareholder returns."

He added another worrying aspect about holding the shares was rivals seizing upon the opportunity to regain market share as Tesco went through a period of transition:

"I have held Tesco shares in my funds for most of the past 20 years, during which time it has proved to be a very successful long-term investment."

"But I now find myself worrying more than ever about the risks -- both macro-economic and business specific risks -- that this investment now entails."

Mr Woodford believes his other holdings are better blue-chip bets, including the UK's fourth-largest supermarket, Wm Morrison (LSE: MRW), which has better growth opportunities in the UK and less exposure to non-food items.

The rest of the proceeds have been recycled into less cyclical businesses, which Mr Woodford believes will reduce the overall economic sensitivity of his Invesco portfolios. 

Indeed, he may have added to smaller holdings such as Smith & Nephew (LSE: SN) and Serco (LSE: SRP), or topped up on old favourites such as GlaxoSmithKline (LSE: GSK) and Vodafone (LSE: VOD)

However, at least one master investor is sticking by Tesco.

While Mr Woodford was selling the retailer, Warren Buffett was buying and has now accumulated 508 million Tesco shares, which represent about 5% of the supermarket and roughly 1.5% of the common-stock portfolio within Mr Buffett's Berkshire Hathaway (NYSE: BRK-B.US) conglomerate. You may wish to read this special free report produced by the Fool, which explains why Warren Buffett still rates Tesco as his top UK blue chip!

On Wednesday, Tesco is expected to own up to further trading pressure when it reports its full-year results. Brokers reckon a 2% decline in first-quarter domestic sales may be revealed.

Our Foolish analysts will soon be on hand to answer your questions about Tesco, its annual results and its future. Look out for a live online chat on Wednesday afternoon -- details to come in Wednesday's FoolWatch Daily!

More on Neil Woodford and Tesco:

> The Motley Fools owns shares in Smith & Nephew and Tesco.

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Comments

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HighbrowNick 16 Apr 2012 , 1:26pm

I'm with Neil Woodford on this one. I managed to get out of Tesco three weeks ago when the shares recovered slightly to 3.30. The company may do well in the long term, but there is too much uncertainty for me. I think there are better opportunities out there!

LateDeveloper 16 Apr 2012 , 1:29pm

One of the many reasons I won't go with fund managers.

Tesco are certainly not in free fall, and non diversification into other markets has managed to destroy companies just as much as over diversification.
We have seen in the past that companies that do diversify, can suffer in the short term, and yet in the long term do better than companies that do not diversify, particularly in recession years.

Tesco has been slammed for diversifying into the US market, but just like any foreign company trying to invest in another country Tesco has had its difficulties.

I tend to think WB has more of his finger on the pulse of the U.S market than NW has anyhow, and would not discount them at this point in time.

jackdaww 16 Apr 2012 , 1:31pm

i almost sold a big chunk at 410 - sadly didnt.

i too was concerned about non food but more importantly tesco management awful attitude to its customers.

i much prefer morrisons as a shop and a company and will be switching as the cahance arises.

Wuffle 16 Apr 2012 , 2:35pm

Are we complicating this one?
We live on an island with four, just four, totally dominant supermarkets. You can buy three of them without messing about outside the FTSE. Unless ASDA creams the others, you'll plod along fine. If you must outperform, why are you buying any of them?

Wuffle.

F958B 16 Apr 2012 , 2:54pm

Wuffle

Yes, supermarkets is like trench warfare in WW1 - one month one side captures a trench, while the next month it is captured back.

As a group, the three FTSE100 supermarkets look attractive. Individually they also look attractive.

In 2010, utilities dominated my portfolio. During 2011 it was pharmaceuticals. Now it's food retail.
By holding all three, I don't have to care which do well or badly, but, I suspect that all three supermarkets will at least match and probably outperform the FTSE on a five-year view.

My portfolio:
9% Tesco
8% Sainsbury
7% Morrisons

dukindiva 16 Apr 2012 , 2:58pm

I can see NW's point of view but I'm with WB (& LateDeveloper :-) ) on this one.

Tescos' move to bigger stores and ranges has risks in a downturn fore sure, but there are benefits too ... Asda/Walmart has been doing this for years.

Expanding outside the UK can only be a good thing, but merely being present in growing economies for the sake of being global needs to be managed very carefully, in my opinion anyway.

I won't be selling my Tesco shares any time soon.

guykguard 16 Apr 2012 , 3:35pm

For many years my family trust held some TSCO, until 2009. Among the reasons for selling then was that most people I consulted about the UK stores said that they didn't like shopping in them. Most far prefer Waitrose and M&S's food stores. Although they are more expensive than Tesco, they still find them good value.
If this resistance to Tesco is at all real or widespread, the way back for the Cohens'covered markets will be arduous. Mr Woodford gives technical reasons for his recent decision, which is fine, but the real one may be as simple as that given by my small circle of friends and acquaintances. Shopping at Tesco is nothing special any more, and may have become too painful an ordeal for too many. A bit like owning the shares?

jackdaww 16 Apr 2012 , 4:11pm

im with guy keyguard and others on this.

the staff are po faced and uninterested.

the store ambience is dismal.

the price drop scam wouldnt fool my 96 year old mom.

Sotograndeman 16 Apr 2012 , 5:04pm

It's a no-brainer to go with Buffett. There is simply no greater investing mind than his. Why is the investing world so reluctant to learn from him?

NW is simply not in the same league. Retailers of this ilk are well within WEB's circle of competence and, having owned it for years, he has had time to assess TSCO in particular - and he's decided to stay with it. Instead of making excuses, what NW should be doing is trying to figure out what WEB can see that he cannot.

I wish there were more opps like this - Buffett buying after a price drops. We should gobble them up.

I made it one of my top holdings after the drop (thanks Neil!). It's one to hold for the very long term.

Tanar 16 Apr 2012 , 5:09pm

jackdaww- the price drop scam would, unfortunately fool my 85 year old Mum - bless her.
Watch out also for spotty oiks in butchers aprons filling the pre-packed meat aisle, cos they will looks like butchers, won't theys?
Also, green aproned produce fillers - Mrs Average Tesco Customer will think of proper greengrocers in days of yore.
Whats next? Chap in the fish counter with hearty beard, oilskins, sea-boots and a wet sou'wester?
This companies arrogance in believing the stupidity of customers is insulting, but, my god, it works and they get away with it!
Dont be too hard on the staff either, they are poorly managed and totally demoralised watching this car crash of a company disintegrate from the inside.
I'll sell 50% of mine and take it to Morrisons.

Tanar

AllytheShrimp 16 Apr 2012 , 5:15pm

Well, the car park in our local tesco is always packed.....

jasonjarvisgbr 16 Apr 2012 , 5:44pm

hmmmmm... Woodford....

.. if his portfolio is in such good nick that he can ditch TSCO based on RISK, good luck to him.

Personally I've got more pressing positions that need addressing !

RobinnBanks 16 Apr 2012 , 6:55pm

“Following a Christmas LFL ex-fuel ex-VAT LFL of -2.3%, we expect our Q4/FY forecast of -1.7%/-0.9% to evidence a better exit rate,” says broker Nomura Securities. Translated into English, that means that after reporting a year-on-year fall in like-for-like (LFL) sales, excluding fuel and value added tax (VAT), of 2.3% over the Christmas period (the six weeks to January 7th), Tesco's fiscal fourth quarter LFL sales will be down 1.7% while LFL sales over the whole year will be down 0.9% compared to a year earlier, according to Nomura's predictions.

Tesco's queues have reduced recently; whether that's better management or less customers is hard to say. I find the staff no worse than many shops - much better than the surly lot in Aldi.

coulddobetter 16 Apr 2012 , 8:48pm

I'm with guykguard on this! I personnally am constantly frustrated by poor shelf labelling, non-existant price labels and confused shelves. And a lot of my aquaintances agree. On one occasion I picked up a single "two for one" pack of ink/paper, attracted by a big label, and looked for the second to make up the "two". I couldn't find a second and at the counter I was told it was the last one so couldn't have the deal and must pay full price. This wasn't the checkout assistant but a "manager" on the phone to her floor manager! Their attitude was atrocious and very off-putting. Most of my purchases there are, I suppose, "distress purchases now.
I think they have a big problem.

jackdaww 16 Apr 2012 , 10:11pm

tesco do have a mountain to climb to turn this around.

however its possibly all in the current price.

0csetdown 16 Apr 2012 , 10:45pm

Personally I stopped going to Tesco after I heard about the way they treat their suppliers,offering a price then reducing it part way into the contract.Is this common practise with the other 3?

AidyLee1 17 Apr 2012 , 9:04am

0csetdown, that's the way most [highly profitable] companies treat their suppliers.

AidyLee1 17 Apr 2012 , 9:09am

Interesting comments - I'm not seen much customer service in Tescos, but as AllytheShrimp pointed out... how many Tesco carparks are standing empty? Their strategy of aiming for more smaller local branches is also paying off - what with so many public houses closing, they've been gaining reasonable premises at reasonable prices. And as WB says... When the markets are fearful...

Nik1961 17 Apr 2012 , 12:20pm

Perhaps if Tesco opened a bar in those PH's they've been buying up, they'd get extra footfall in the shop as well!

lameuse 17 Apr 2012 , 1:30pm

So much short-termism on this Board! So now Morrisons is 'good guy', Tesco 'bad guy'. Yet it is not so long ago that vitually everyone on TMF said that Morrisons had a ghastly Northern culture that would never work down South and everyone agreed that they had made a mess of the merger with Safeway...
Of course, I do agree that Morrisons has opportunities to grow as they are much smaller in UK than Tesco.

Clitheroekid 17 Apr 2012 , 1:49pm

It's always a lot easier to find people to criticise than praise. The desire to effect removal from perches is a fundamental part of the British character.

If it were Asda or Sainsbury's in the limelight you can be sure that there would be just as many people lining up to provide anecdotes of how awful the service / attitude was in their local branch.

But I agree that one's own experience of a company does have an effect on one's judgment as to whether it would represent a good investment, and on a purely personal and anecdotal level my local Tesco does a very good job.

It's also the only local supermarket that's `open all hours', which is very useful, and its car park is always a lot busier than Sainsbury’s, which is just down the road. So at least customers in this area have voted with their feet.

I've also noticed that after a long period of drought with Clubcard vouchers I've started receiving ones that are accurately targeted at the products I buy regularly.

Although in cash terms these don't make a lot of difference, being of a mildly Scrooge mentality I can't deny that I do get some modest pleasure in chopping a fiver off my shopping bill now and again. The `something for nothing' technique does undoubtedly work.

Anyway, I don’t see that Woodford’s recent investment performance is all that impressive. If one looks at the progress of Edinburgh Investment Trust relative to the FTSE 250 it’s only more or less tracked it over the past 4 years that he’s been in charge - http://www.fool.co.uk/caps/quote/edin/chart.aspx?source=icasittab0000005

And I’m glad to see that Mr Market is equally sceptical about his `investment guru’ status, as the shares are up 1.5% today despite his comments.

Buffett 1 Woodford 0!

F958B 17 Apr 2012 , 2:10pm

lameuse

I agree.

One year, it's Sainsbury "in trouble". Then it's Morrisons. Now it's Tesco. Next year it'll be ASDA.....then the following year it will be the discounters as economic recovery comes and people start trading back up again.
Round.....and round.......and round..........the wheels of sentiment turn.

Prof103 17 Apr 2012 , 3:11pm

After the longmarket run, I was fortunate enough to sell half of my holdings including Tesco in January. While not looking to top up, the subsequent 20% price drop proved irresistable so that for Tesco at least I am back up to a full holding.

If I were going to lose sleep on any share, and I don't, it would not be Tesco. A bigger concern for me is the still considerable weight of ollies and miners that may be coming off their high earnings.

P103

vinchainsaw 17 Apr 2012 , 3:39pm

What most people on these boards dont realise is that they are not the Tesco target demographic.

Clitheroekid 17 Apr 2012 , 6:28pm

What most people on these boards dont realise is that they are not the Tesco target demographic.

I quite agree. The thought occurred to me when reading guykguard's post:

For many years my family trust held some TSCO, until 2009. Among the reasons for selling then was that most people I consulted about the UK stores said that they didn't like shopping in them. Most far prefer Waitrose and M&S's food stores.

I think it's fair to say that most Tesco customers are rather more likely to be the beneficiaries of family credit than family trusts!

jaizan 17 Apr 2012 , 6:54pm

1 Woodford get's "only" + 10% v FTSE over 4 years @ the Edinburgh trust? Firstly that's rather a short term measure. Secondly if that 2.5% outperformance is continued over 20 years, that's your nest egg 64% larger than merely tracking the index.

2 Round & round the wheels of sentiment go, so buy what's out of fashion?

3 One small point, the Carrefour share price has been hammered over the last 10 years. I would like to understand "why it's different" here before adding to my solitary supermarket holding (Sainsbury).

brightncheerful 17 Apr 2012 , 7:29pm

Tesco went ex-growth a long time ago, about a year before Sir Terry stopped being CEO: I guess he did the decent things and waited before it was too obvious, that T was keeping up appearances by juggling all the balls in the air and hoping none would fall.



SevenPillars 18 Apr 2012 , 8:55am

So, Tesco delivered its £3.9billion "profit warning" today! Supposedly in line with market expectations, although most of the recent market "experts" were expecting around £3.7billion. However, the average profit expected by these experts was £3.88billion, so Tesco's actually beat expectations slightly. Where's the profit warning then?

The 20%+ knocked off the share price back in January looks a tad overdone. Still, what should we expect from overpaid city experts?

poorMfool 18 Apr 2012 , 12:29pm

Is that ex the unknown factor sperts the drip under pressure ?

I wish I had bought more TSCO shares before today's announcement :)

DVB99 19 Apr 2012 , 9:55am

Its easy to knock Neil Woodford, yet his long-term performance is extremely good. while he is not in Buffett's league, he is still worth following.
Also, he won't get every decision right ( nor will Buffett for that matter)

As Tesco, i think they have such a large share of the market, it is difficult to maintain that growth ad infinitum. Personally i find the shopping experience at Tesco poor compared to Sainsbury ( but hardly any cheaper!).

Generally the other Supermarkets tend not to be as tough with their suppliers. My brother-in-law used to supply Tesco but was squeezed too much, he is now suppling Waitrose, who he says are very fair

Francisco23 20 Apr 2012 , 7:42pm

Buffet made his money in times of low taxes, low inflation, and importantly, during a time when prices provided proper price signals.

Now all we have are interventions, not prices. He was an undoubted success in his field.

A new Berkshire investor in 1998 has earned an annualised rate of return of just 3.3% over the 10 years to 2008 - half the return made from buying a 10 year treasury.

Shall we mention the past 10 years vs gold for another considered measure of his performance?

The man undoubtedly tries to be a manipulator of the masses through his now loved-up media, probably for political purposes.

Today he misleads about his tax % and tries to influence US tax policy when, if he wants to pay more tax, he can actually make a voluntary donation.

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