Tesco Falls After Profit Warning

Published in Company Comment on 12 January 2012

Christmas sales drop, as price-cutting fails to bring in the shoppers.

Well, I wasn't expecting to wake up this morning to a 14% fall in the Tesco (LSE: TSCO) share price. But that's what happened after the UK's leading supermarket posted disappointing Christmas trading figures, and cut back its expectations for this year and next.

We were expecting a squeeze on margins this year, and that was echoed by modest Yuletide figures from Wm Morrison (LSE: MRW) on Monday. Wednesday's update from J Sainsbury (LSE: SBRY), which was pretty upbeat and showed a 2.1% rise in like-for-like sales, gave us a glimmer of hope for the Tesco's prospects.

But that was dashed today. Excluding petrol and VAT, like-for-like sales for the six weeks to 7 January were 2.3% down on the previous year, even though 2010's cold spell kept many shoppers at home that year.

Slower future

Although Tesco has blazed the price-cutting trail with its £500m Big Price Drop campaign, it backed off from promotional activity in the run-up to Christmas just as rivals were cranking it up, and that appears to have driven the shoppers away.

Profit for the full year is now expected to come in towards the lower end of current City forecasts, and for 2012/13, "substantially increased investment to deliver an even better shopping trip for customers" is expected to result in minimal profit growth for that year.

Tesco's future strategy is now set to move away from high levels of superstore openings, with a focus more towards internet sales for non-food items.

Still a fair investment

Using the lower end of current forecasts, the current share price of 330p puts the shares on a P/E of around 10. And this year's dividend, if it comes in as expected, will be about 4.7%. If we assume the worst case of no growth next year, obviously those figures won't change.

Has Tesco lost its way? No, not at all. Tesco still commands 30% of the UK's market share, with Asda coming in second place (although that share is marginally down on a year ago). It's a company focused on the long term, and this is surely just a short-term hiccup -- and the price fall may well have presented us with a nice buying opportunity over the near future.

But these figures will put pressure on new chief executive Philip Clarke, whose first Christmas at the helm will not have provided much of a boost to his popularity.

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Comments

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BigJC1 12 Jan 2012 , 11:21am

"If we assume the worst case of no growth next year"; I can think of a lot worse cases then no growth next year, just ask Argos.

The high street has the same number of shoppers but with less money in their pockets, plenty of choice of where to shop (many of which involve the internet) and high visibility of prices - no wonder Tesco are finding it tough. Their price drop event was a real damp squib, shoppers are just too canny to see through such tosh, Morrisons were offering £25 cash off, Tesco 2p of your beans !

A 14% drop looks excessive particularly given Tescos overseas growth so hopefully there will be some bounce back.

F958B 12 Jan 2012 , 11:51am

The selloff is overdone.
Tesco are not in financial difficulties - they simply said that profits will remain flat for a year or two.
The dividend is very unlikely to be affected.

Just as Tesco stormed ahead in the consumer boom - fuelled by non-food items - it is the non-food items (electricals etc) which have been acting as a drag on performance as consumers cut back on non-essential purchases.

Once the non-food sales reach their new low plateau, Tesco should start printing growth numbers again.

Also remember that their overseas businesses are still performing satisfactorily.

If I had enough money to buy the whole of Tesco, I would still be happy to pay yesterday's 390p price to take posession of the whole business even after today's announcement.

A couple of weeks ago, I suggested that I felt that the resilient "defensives" which did well in 2011 were looking relatively unattractive compared to some of the financials and commodity companies - and that the market may well get back to a "risk-on" attitude and dump defensives to pay for it.
Today's excessive drop in Tesco - and the other retailers - probably reflects an element of sector rotation that the market was just looking for any excuse to persuade them to switch.

SevenPillars 12 Jan 2012 , 11:59am

An incredible fall really. At one stage almost £5billion was knocked off the share price, which considering it will still produce profits at the lower end of expectations and it is still growing pretty strongly worldwide tells you how illogical the market can be.

The UK results were not good, but the market seems intent on ignoring the international aspect of Tesco completely. Evidence of this was the report a few days ago that Tesco were to close 12 stores in the US. It totally ignored that they were opening 2 new stores for every one being mothballed. The share price went down - Crazy.

Tesco's fall also took Sainsburys down with it even though their results were the "best Christmas trading ever".

Morrisons made it a trio of trading hits today, no doubt the shorters are having a field day, even though their LFL sales while lower than expectations were much better than Tesco's UK numbers.

Difficult to know what to make of it all accept that all three now look cheap when compared to a lot of the rubbish on the market, although the market clearly hates retailers right now so catching these falling knives is dangerous as the market could decide to knock a few more £billion off the share price any time.

Funny thing is, if the market believes that these results are showing us a wider picture of a struggling UK economy, then it is difficult to understand why the FTSE is up today. I know it is an international index, but then that never explains why it falls on bad domestic news at other times. Can't help but feel that there is a bit of a market shake out going on here so that the institutions can buy back cheap. The size of the falls today make little sense at all.

Illiswilgig 12 Jan 2012 , 12:27pm

Excuse my ignorance -but doesn't the trading statement say 'minimal Group trading profit growth for the year.' which is not the same as minimal profit growth?

I know its something of a technicality but group trading profit excludes a number of items, specifically property related items, JV's and finance costs and I suspect this is why the next paragraph reminds us that capex is expected to fall significantly.

Now I'm not suggesting that Tesco will fiddle the figures any more than normal but it's worth noting that at the recent interims group 'trading' profit was +3.7%, group stat prof/operating profit +5.9% and group Pbt +12.1% and underlying profit +6.2% just to give some idea of the gap that can ocurr between trading and operating profits.

No doubt the UK business has got a lot of work to do which will take time - and we can now see why Phil Clarke has established a separate board for the business. But it would be a mistake, though an understandable reaction, to read too much into this mornings kitchen sink exercise in my view,

cheers

Mark


richjfool 12 Jan 2012 , 12:36pm

There does seem to be a preoccupation with the UK Xmas period results, and resultant knee-jerk reaction, yet Tesco's global operations and performance seem to have been ignored or overlooked.

GrangeInvestor 12 Jan 2012 , 12:56pm

I bought this morning at 335p, doubling my holding in Tesco.

richjfool 12 Jan 2012 , 1:03pm

As the falls have extended to other supermarkets, albeit to a lesser extent, is this an opportunity to buy more Morrisons?

SevenPillars 12 Jan 2012 , 1:15pm

Surely the bigger buying opportunity right now is Sainsbury? Best Christmas trading ever, share price heavily knocked down on the back of Tesco, offers the best dividend of the 3 and is growing reasonably well. Depends on timeframe I suppose, but a bounce, deadcat or otherwise, must surely be coming once the market realizes that the falls have been overdone. Tesco's result does not justify knocking £5billion off the value of the company, God help it if it ever announced a slight loss (as against a 5% increase across the whole company - that's £1billion in value fall for each 1% of increase!).

SevenPillars 12 Jan 2012 , 1:22pm

Just for clarity, I should have said that Tesco's worldwide, year on year growth is reported at 5.2%. So, for each 1% of worldwide growth the market has taken £1billion of value off the share price so far today. Strange world we live in.

jackdaww 12 Jan 2012 , 1:22pm

filling my boots with tesco at 330 AND morrisons at 280.

what will this look like in five years time.

tux222 12 Jan 2012 , 1:43pm

The real question is whether Tesco is slipping, or not. Tesco is positioned in a tough part of the market, between the discounters (cheaper and not one bit cheerful) and Sainsbury's and Waitrose (more expensive but better stuff in nicer shops).

Slipping would mean that they fail to respond well to this "glitch" and the company's fortunes continue to wane. Not slipping means that they'll re-tune their strategy and recover the lost sales within a few months. A great buying opportunity if the latter!

CunningCliff 12 Jan 2012 , 1:44pm

Tesco shares down 15% this morning? I blame Antony Worrall Thompson! :0)

Cliff

LastChip 12 Jan 2012 , 1:58pm

Right or wrong, I've been buying this morning. At these prices, it's a no brainer for an international defensive business.

We'll see if I have egg all over my face soon enough!

GrangeInvestor 12 Jan 2012 , 2:10pm

Hargreaves Lansdown are reporting that Tesco is their most traded stock today and that 99% of orders are buy!

MinnowMummer 12 Jan 2012 , 2:37pm

is it possible that Tesco's reduced (UK) income recently is tied however slightly to reported changes to their charity sponsorship?

SevenPillars 12 Jan 2012 , 2:47pm

LastChip, I would say you are probably right, but unfortunately the market does not see Tesco as an international business, if they did there is no way it would fall 15% on these results, after all its total sales growth was 5.2%. It is still seen as a UK retailing business.

GrangeInvestor, it makes you wonder who is selling then?

richjfool 12 Jan 2012 , 2:49pm

Well I topped up Tesco, MRW & SSE, which had all fallen today.

CunningCliff 12 Jan 2012 , 3:03pm

Which would you rather own today? Tesco or Ocado?

Surely the former, agreed?

See: Ocado Shares Soar As Sales Surge
http://www.fool.co.uk/news/investing/company-comment/2012/01/12/ocado-shares-soar-as-sales-surge.aspx


Cliff

fedupwithbanks 12 Jan 2012 , 3:26pm

Topped up my boys Sipp and waded in at £3.28 myself. Christmas came late!

Shorters will buy back before divi time.

LastChip 12 Jan 2012 , 3:28pm

SevenPillars, I can't argue with that, but the market isn't logical. If it was, the market as we know it wouldn't exist.

I can't begin to count the number of times I've seen this scenario before, and soon after when the sellers decide they've overdone it, the price rebounds.

Of course, I could be absolutely off my trolley and totally wrong, but as I said, we'll all know soon enough.

The point is, even if I am wrong, the company is essentially solid and defensive in these troubled times. If I have to own them for a few years just to break even on capital, sobeit. But in the meantime (hopefully) I picked up a good few dividends along the way. And by the way, at my time of life, dividends are an extremely important part of the equation.

Sometimes though, betting against the heard pays off handsomely.

SevenPillars 12 Jan 2012 , 3:42pm

CunningCliff

Interesting that you mention Ocado. Tesco's online numbers, as reported today, like other things seem to have been totally forgotten.

Sales growth 14%

One million orders during the period. Ocado had a little over 450,000 orders in December.

Seems to me like Tesco is the better long term bet online as well.

LastChip

I agree with you. I've seen the same happen many times. As an investor (or trader) you just have to hope that this is the time when buying into the falling knife makes sense. With Tesco, Sainsbury and Morrisons it seems to me that the ground is safer to buy than say with a retailer like Dixons, PC World, Game or HMV. There's clearly no comparison, but markets as you know are not that rational. Today they are behaving as if they believe that for Tesco the Mayan calender was right!

apprenticeDRL 12 Jan 2012 , 4:06pm

I have had Tesco on my watch list for a long time and finally took the plunge today at 129. As usual I failed to catch the falling knife and they are at 124 now :(.
Reading some of the internet boards there now seems to be building concensus that these shares could fall below 300 and I have seen one comment that they could even drop to 270ish before they find support as a large percentage of Tesco profits are made over the Christmas period (not my comment).

Having now become a Tesco shareholder I would be interested in what other poeple think about which direction this share will go from here.

dubre 12 Jan 2012 , 5:08pm

Lots of complacency emanating from supporters of main line food retailers.

I wonder how far the inroads made by such as Lidl & Aldi will go.The women in my family only go to Tesco etc. to get things unobtainable in the discounters.They tell me that like for like product specification is often better.Own brand manufacturers will confirm this.

LastChip 12 Jan 2012 , 5:41pm

In truth dubre, my wife has tried Aldi and was very underwhelmed. Not tried Lidl though, so can't comment.

I don't think it's right to sight complacency. It's all about market presence and there are now few places in the UK, where you can't find a local Tesco's or Sainsburys, some of which are now 24 hour operations.

Certainly where I live Aldi and Lidl remain very minor players, even after some years presence. While Asda has fewer stores, those that do exist are (in my view) a far greater competitive challenge. Walmart being the owner, you wouldn't expect anything less. One should also not forget M&S and Waitrose either, though they are perceived as a more expensive option.

jf2007 12 Jan 2012 , 6:59pm

Tesco tactics in the UK, announce price cuts but jack up the price of everything else do not fool shoppers. I'm bearish on domestic progress and sales for Tesco but bullish on its international business. I might buy in if the FTSE 100 falls below 5500 but not now as i believe the general market is overdue a sell-off

jaizan 12 Jan 2012 , 7:03pm

Well, the Milton Keynes Tesco usually has some essential items missing from the shelves, followed by long queues and slow dour customer service.

It's no surprise to see them losing out to Sainsburys.

jackdaww 13 Jan 2012 , 8:52am

there is huge scope for improved service and attitude to tesco's customers..

they should take a leaf out of amazons book.

i think they are also overstaffed with middle supervisors who are frequently seen standing around chatting socially.

SevenPillars 13 Jan 2012 , 9:14am

apprenticeDRL

There is clearly a possibility of a fall below 300, especially if we get a general market pullback over the next week or so as seems likely given the move up to around 5700 on the FTSE since the new year. FTSE up again today, but there is still no love or bounce for Tesco in that move, so far it is down again, 318 as I write. 270 seems very low, last seen by Tesco back in 2004 according to the charts, even during the worse days of the credit crunch in 2008 in didn't go below 280.

Yesterday was the worse one day fall in the company's history according to reports, which given all the crashes and financial fears of recent times is quite remarkable, you would have thought that they had announced a loss and no growth rather than a profit and 5.2% sales growth! The extent of the fall still looks very overdone unless people believe that this is the start of major problems for the company.

Given that they have 30% of the UK market it is easier to see this falling further as it is simply difficult for a company of this size to keep on growing in its home market, hence the rapid expansion abroad. I don't buy the doom and gloom in the city yesterday that reduced earnings in the UK stops expansion overseas, it may slow yes, but the company is still making £billions of profit! The fall is grossly unfair to long term shareholders who bought at a higher price, but fairness plays no part in the city game. Yesterday was a good example of the stupidity of rational market theory. There is nothing rational about what props up or otherwise a share price.

If they had announced a real profits warning, along the lines of the type we are used to seeing from the likes of Blacks Leisure, HMV, etc, then it would be time to worry. But for now Tesco shareholders have a dividend of 4.5%, with I suspect little or no chance of it being cut (although Digital Look has next years divi at 4.00% which seems strange to me). Sainsbury has a dividend of around 5.3%, again with probably little chance of it being cut.

For those who bought into the falling knife there could still be further falls to come, given the lack of an immediate bounce. This concerns me a little because usually after such a big, quick fall, a retracement of up to half the fall tends to happen quite quickly. So far nothing with Tesco, while Morrisons as an comparison has retraced slightly. Probably best now to wait for the dust to settle and keep watching the charts,partly on the basis that the fundamentals of Tesco right now seem to have been thrown out of the city window.

SevenPillars 13 Jan 2012 , 10:45am

A question for others here. Did Tesco actually announce a "profits warning" yesterday? I find this interesting because of a definition of what a profits warning actually is. According to the This is Money website, Tesco disappointed because for the first time ever it failed to announce a year on year 10% increase in profits. This seems picky to me, I mean, 10% increase in profits still expected every year in a time of austerity?

I think Tesco's announced that profits would be at the lower end of city expectations, not below expectations. Again, how is that a profit warning accept that they are not hitting the over estimates of bloated city analysts? Panmure Gordon have lowered their profit estimates for next year by 15% to £3.88 billion, which is still £350 million higher than 2011 profits which were £3.53 billion. What a profit warning that is! Let's not be greedy!

jackdaww 13 Jan 2012 , 5:38pm


worth noting a director just bought £100k at 329.

goodlifer 13 Jan 2012 , 7:54pm

Getting down to brass tacks, I decided to hang onto what I bought last spring for around £4.00.
I also bought some more for £3.15.

Lunatic or genius?

What action have other Fools decided to take?
And why?

ANuvver 13 Jan 2012 , 8:14pm

Finally Tesco comes within my sniffing zone. Sadly for many, I reckon this knife has further to fall, along with all other equities - FTSE at 5,6-5,7 is la-la land.

The drop seems very odd to me. Profit-taking, sector rotation? Who can tell. Surely the divi isn't in question? The perception that overseas expansion may take a hit aro lower than expected domestic revenues? Wonder what Mr "I'll be in there with a shovel if it drops" Buffett is making of this.

"Pile it high and sell it cheap" starts to take on myriad new meanings...

SevenPillars 13 Jan 2012 , 10:27pm

JackdawW

I read a report today that Tesco's UK Chief Operating Officer actually sold 50,000 shares on Jan 4th at a price of 401. Tesco say they are confident he had no prior knowledge of any price sensitive information, but this will clearly leave a sour taste in the mouth of many shareholders watching the near 25% fall since. At the very least this is an appalling example of Tesco shooting itself in the foot right now.

Here's the link.

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9013236/Tesco-chief-sold-shares-before-profits-warning.html

jackdaww 14 Jan 2012 , 2:07pm

another worry about tesco.

i suspect they have a collection of prehistoric IT systems.

even within the bank business their are seperate logins for three systems eg savings, credit cards,loans.

each of these logins has its own set of associated security criteria.

goodlifer 14 Jan 2012 , 4:33pm

ANuvver

" Sadly for many, I reckon this knife has further to fall, along with all other equities - FTSE at 5,6-5,7 is la-la land."

It wouldn't make me sad - I can hardly wait for it to happen.
Why on earth doesn't it?

jf2007 15 Jan 2012 , 5:25pm

The Tesco i work in hasn't taken on any new staff in 3 years, saturday is the busiest day but has highest staff turnover. Tesco ae trying to save a few thousand on carry bags and frequently run out which annoys customers. They are also losing thousands to theft because they dont want to pay a security guard £7 an hour. In spite of this the store frequently misses targets. Excessive cost saving targets from head office are to blame for not enough staff at every level

spyknife 15 Jan 2012 , 7:38pm

Tesco was the first share I ever bought back in 1999, I was 19 and knew the company would do well in the coming years.
I remember paying 171p for 500 shares ! I sold them I think around 6 months later for 230p. LOL

LookFriend 16 Jan 2012 , 3:47pm

There are many simple cheap measures that TESCO management could do to improve the customer’s shopping experience.

Note the litter on the streets and pavements surrounding TESCO’s stores. The management put no importance on the immediate environment: sending a lad out from time to time with a brush and shovel.

Note the ten or so abandoned trolleys at every entrance. The management give this no importance. The entrances look like a wasteland.

Note the amount of litter among the bushes on every border. Would you let this management manage your garden?

Note the barely visible lines in the car park: no interest to management. The white patches on the pedestrian crossing are barely visible. It is an accident waiting to happen – with subsequent claims for damages. Neat clean white lines in the car park create an impression that the management actually cares.

Note the litter in the car park: management clearly does not tell staff to collect litter when they collect trolleys.

Note the number of trolleys with litter in them: management clearly does not tell the staff to remove litter when they gather up the trolleys.

Note the lack of the smaller lighter trolleys that many customers prefer: management deliberately forces customers to use larger trolleys – hoping that they will buy more. Is this is putting the customer first?

Note the lack of any notice board, stating, with a picture, who the duty manager is, and how HAPPY he would be to help you. Is this is putting the customer first?

Note the newspaper stand: papers are DELIBERATELY unreadable - on display upside-down. Is this is putting the customer first?

Note the lack of a mirror. A small courtesy I know, but surely shoppers like to check their attire. They may well be meeting neighbours on their enjoyable? visit to TESCOS. Is this is putting the customer first?

Note the state of the customer toilets! Compared with other supermarkets, are they not third-rate? The bitter smell of cheap detergent, no chart showing the cleaning and checking schedule, no flowers or canned music. Quite often some facility is out of use. If top management are perfectly happy with this low, basic level of cleanliness, would you accept an invitation to dinner from a member of management?

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