Tesco's Sales Slide Again

Published in Company Comment on 11 June 2012

The UK's biggest supermarket is struggling to 'turn the tanker around' in its home market.

So far, 2012 has been an annus horribilis for Tesco (LSE: TSCO), the UK's largest supermarket chain.

Thanks to weak consumer confidence, falling disposable incomes and feeble wage growth, British consumers keep tightening their belts. As a result, Tesco has seen its UK market share drop to levels not seen since 2005.

Sales still slipping

Last Wednesday, after Tesco shares dipped below the £3 mark, I suggested that they looked increasingly desirable to value investors and dividend fans. This morning, the Goliath of retailing released a trading update, giving me another chance to review its recovery.

In the first quarter of its 2012-13 financial year, covering the 91 days to 26 May, UK like-for-like (LFL) sales were down 1.5%, excluding VAT and petrol sales. This was hardly an improvement on the 1.6% drop recorded in the previous quarter, so Tesco's turnaround plan is struggling to gain traction. Also, revenues fell by 3.7% at Tesco Bank, which recently moved 2.8 million credit-card accounts to its in-house systems.

However, thanks to international sales rising by 0.5%, overall LFL sales were down a mere 0.7%. Tesco's star performer overseas was the Fresh & Easy chain in the US (+3.6%), plus Slovakia (+3.4%), Poland (+3.3%) and Thailand (+2.5%) also did well. Then again, US sales growth has slumped sharply from the 12.3% rise in LFL sales seen in the fourth quarter of 2011-12.

Furthermore, Tesco saw improved market shares in 11 of its 12 international markets.

Turning against Tesco?

Philip Clarke, Tesco's chief executive, said of these results:

"Tesco has performed robustly in the first quarter, despite subdued consumer confidence in all our markets. We are rapidly implementing our six-point UK plan and I'm particularly proud of the re-launch of our Everyday Value range and the fact we have now put extra staff into 700 of our stores - in 500 of them within the last three weeks alone. Our customers are seeing the evidence of the changes we're making and they're telling us they like what they see."

Personally, I'm not sure that Clarke has his ear firmly pinned to the ground.

Whenever I've written or talked about Tesco this year, I've received overwhelmingly negative feedback on Tesco's customer service, product quality and store layouts -- and many of these critics are now ex-customers. While this is purely anecdotal feedback, it does seem to represent a growing anti-Tesco groundswell of opinion.

Nevertheless, at the top level, Tesco continues to generate skipfuls of cash and its pre-tax profit hit an all-time high of £3.8 billion in 2011-12. What's more, overall group sales are ahead 2.2% this year, thanks to store openings and expansion.

In addition, Tesco claims to be outperforming the wider UK market. The latest data show that UK market growth declined from 3.7% in Q4 to 2.4% in Q1, down 1.3%. However, Tesco's own sales growth reduced from 2.3% to 2%, down only 0.3%. Hence, in this relative respect, it is beating its rivals, but this offers little comfort to shareholders.

Cheap shares on the shelf

As part of Tesco's six-pronged 'Build a Better Tesco' strategy, the FTSE 100 giant has recruited, trained and put to work 4,300 additional new workers. A further 145,000 employees have been given specialist training relevant to their departments. More than 100 stores have been 'refreshed' and seven million Clubcard customers have been sent additional, more personalised mailings.

Additionally, Tesco has made improvements to 350 of its Tesco Standard products, notably ready meals, while adding 500 brand-new products. Also, the Tesco Direct range now includes over 100,000 non-food products.

Although not included in these results, Tesco enjoyed a welcome boost from the Queen's Diamond Jubilee, notching up record weekly sales exceeding £1 billion.

Tesco made no changes to market expectations for its full-year outlook and, as I write, its shares trade at 301.2p, valuing the mega-grocer at over £24 billion. As this price, its shares trade on a forward price-to-earnings ratio of 8.7 and offer a prospective dividend yield of 5%, covered a generous 2.3 times.

Despite Tesco's continued weakness in the UK, it remains a cash-generating juggernaut. Therefore, I still firmly believe that its shares offer deep value at their current levels.

Finally, do you know the reasons why investment genius Warren Buffett -- the world's third-richest man, with a $44 billion fortune -- has been piling into the UK supermarket this year? To find out, simply download your free copy of our latest report, The British Business That Warren Buffett Loves.

More from Cliff D'Arcy:

> Cliff does not own any of the shares mentioned in this article. The Motley Fool owns shares of Tesco.

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snikmij 11 Jun 2012 , 2:52pm

Makes me wonder where the management are buying there food from (Waitrose?, he said jokingly, I hope).

snoekie 11 Jun 2012 , 4:35pm

£2.50 later this year?

ScillyFool 11 Jun 2012 , 5:34pm

How about an objective assessment of Tesco, comparing it's reality with the competition instead of just rehashing the same comments as all the other "economic" hacks.

My own assessment, for what it's worth, but based on actually visiting supermarkets over the last few weeks.

Sainsbury's - nice colour scheme, shop quite empty (of consumers). Most expensive of all the supermarkets for an average weeks shop.

Morrisons - nice colour scheme, nice store layout, shop even emptier of punters than Sainsburys. Reasonably expensive for our normal weeks shop.

ASDA - revolting colour scheme, aisles too narrow, more shoppers about. Equal cheapest for our weeks shop.

Tesco - pretty awful colour scheme, still need a calculator to work out if their "deals" really are deals, busiest of all the supermarkets by quite a margin. Equal price for a weeks shop with ASDA.

If I were the CEO of any of the other supermarkets I would be slightly worried as to why there were more customers in Tesco than my own supermarket.

Historical sales data doesn't tell you anything about the present or the future. For that you need to get out and see for yourself.

I know which supermarket shares I shall be buying on the next Eurozone scare (yes, there will be one).

F958B 11 Jun 2012 , 6:28pm

A year ago Fools were bashing GSK after a decade's share price underperformance and an entire quarter's revenues were wiped out by litigation (causing fear that GSK's dividend would be cancelled).

There were cries of "patent expiry" and "government healthcare cutbacks" which were certain to turn GSK into a basket case; probably in the hands of administrators within a year or two, if you believed the doom and gloom sentiment at the time.

I guess the doom-mongers got bored of GSK-bashing and now it's Tesco's turn. I see very little discussion about GSK now, after 2011 silenced the GSK-doom-mongers.

Tesco will be fine, as most investors with plenty of experience will realise. It's just another sector rotation, with investors and money managers spinning a story to explain why the shares declined. But every company has reasons why investors should worry - it's just that investors let share price movements tell them which factors to focus on. Share price up: focus on the good stuff. Share price down: focus on the bad stuff as an explanation.

For example: water companies are riding high at the moment - but have investors forgotten (or are so young they haven't seen enough of market history) to remember the harsh OFWAT price determination in the late 1990's?
This hammered the share prices of water companies and actually sent Hyder Water down the plughole due to its high debt burden unable to be supported by the price cuts imposed by OFWAT.
Back then, investor sentiment was rotten; I know because I was a buyer of water companies while they were depressed and it was not a comfortable emotional ride.

In summary: I can be a pessimist and find reasons why not to buy most companies - including Tesco - or I can be an optimist and find reasons why I should buy most companies.

Tesco should prove very rewarding for investors with patience (several years time horizon) and who aren't easily scared-out of their holdings by crowd behavior and panic.

In the meantime "while-you-wait", enjoy a 5% dividend; where else can high, stable, well-covered dividends be found, without risking potential "yield traps" such as financials or companies with troubling debt loads?

F958B 11 Jun 2012 , 7:03pm

Or we can think about it rationally.

A fairly typical water company valuation is:
Forward P/E: 17x.
Forward dividend yield: 5%.
Forward dividend cover: 1.2x.
Forward interest cover: 3x

Tesco valuation is:
Forward P/E: 9x.
Forward dividend yield: 5%.
Forward dividend cover: 2.2x.
Forward interest cover: 7x

Tesco is far, far stronger - in terms of debt coverage or in terms of dividend sustainability, or even regulatory interference. Have investors not forgotten the 11% cut in dividends of the water sector a year ago? Or are investors simply seeing and hearing what they want, while conveniently ignoring what doesn't suit what they want to believe.

To me, the facts - not opinions or emotions - say that Tesco is a much better long-term investment than most other companies on the market. The company has far more predictable earnings than most, the share price valuation is low, the financial strength is good, the dividend is quite generous and it is strongly covered by earnings.

However, I'm not saying that Tesco shares about about to launch like a rocket, nor that they'll deliver 20% annual returns if held for a decade or more. They are suitable as a long-term, core holding, for investors who don't constantly feel the urge to fiddle with their portfolio*. If held for 10+ years, I would think annual total returns into the low teens percent would not be surprising.

For the record: my last significant portfolio "fiddle" was adding a new holding in Centrica in January.

JackShephard 11 Jun 2012 , 7:22pm

@SeillyFool - I agree. Here is an objective assessment against the competition that I found.


ScillyFool 11 Jun 2012 , 7:52pm

Hi Jack, thanks for the link to a proper peer-analysis site. It just goes to show the value of an objective analysis, pulling no punches and not being influenced by "media-spiel". Definitely a site I shall be visiting again.

snoekie 11 Jun 2012 , 9:53pm

F95, I have been watching Tesco for years and when I have some spare readies for a decent holding I will be in there.

But the price is going to be hit when the euro smelly hits the fan, and that is almost inevitable.

F958B 11 Jun 2012 , 10:49pm


Yes, maybe Tesco and/or other shares will be hit if/when Europe disappears up its own backside.
But where can an investor hide from such a storm, with interest rates on cash and bonds below inflation - and with the threat of bank collapses, government debt defaults or currency devaluations?

GMichie 11 Jun 2012 , 10:59pm

F95, I would be looking at the defensive shares (like TESCO) and also shares that diversify across the globe such as Diageo, GSK etc. Mining was a good bet, but fairly low and risky at the moment, due to the likely fallout in the Japanese economy. I don't think there is any certain hiding place, just some more likely survivors.

Robert1963 12 Jun 2012 , 7:42pm

F958b I am very new to all this and I must say I thought what you said was well written and informative, I for one hope your right having bought about 3K in shares in Tesco having read what a lot of my fellow fools have advised and having listened to their advise I am in for the long term and hope the dividends continue to grow along with the share price long term.


sonrisa1 16 Jun 2012 , 6:52pm

Capital cube looks very good but I do not nderstand much of it, anyhow bought below 300p & thanks to others who know much more than me!

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