Is Tesco Turning?

Published in Company Comment on 5 September 2012

We look at progress on its recovery plan.

It came out of the blue, slashing nearly a quarter off the share price. Tesco's (LSE: TSCO) profit warning in January, its first for 20 years, divided investors between bulls who saw it as a temporary glitch and bears who saw more serious writing on the wall.

It wasn't just among private investors that opinions were sharply divided. Investment guru Warren Buffett rapidly upped his stake to over 5%. But high-yield fund management superstar Neil Woodford took a bearish view, selling out completely in April.

So how is Tesco faring now?

As far as the share price goes, there is little indication of recovery. At 338p, they are still 16% below their early January high of 411p. But there is some sign they are slowly clawing their way back. They are up 6.5% from the post-profit warning low, during which time the FTSE 100 (UKX) has gone nowhere. Meanwhile, rival J Sainsbury (LSE: SBRY) has motored up 14% and William Morrison (LSE: MRW) has slipped 3%.

Hubris

Tesco's sin was one of hubris, perhaps not surprising in the light of former CEO Terry Leahy's very long and successful tenure. It took its core UK grocery business for granted and neglected it in favour of exciting growth opportunities internationally and in non-food business, from out-of-town hypermarkets to banking.

Nemesis came when the UK shopper woke up to Tesco's poorer customer service and product offering, and its grocery market share slipped. Meanwhile, the new markets proved tough. Internationally, Tesco lacks the market power it has at home, hypermarkets found online competition tougher than was expected, and some new ventures such as second-hand cars were just a step too far.

Tesco's act of repentance, unveiled by new CEO Philip Clarke in April, was to refocus investment on the core UK grocery. Store expansion would be cut back, while more would be spent on refurbishing existing stores, improving staffing, and in price promotions.

Trench warfare

Is it working? Competition in the UK grocery sector is rather like trench warfare. Tesco's market share is around the 30% level, roughly double that of each of its big three rivals, Sainsbury, Morrison and Walmart (NYSE: WMT.US)-owned Asda. A big push in sales translates into just a small increase in market share.

Tesco's market share has continued slipping all year, but recent figures hint at a turnaround. Measured over the 12 weeks to 5 August, its market share slipped marginally to 30.9%, but in the final four weeks of that period it rose to 31.4%, according to data from Kantar Worldpanel. In those four weeks sales grew 5.1%, ahead of Asda at 4.9%, Sainsbury at 2.7% and Morrison at 1.4%. It's a very small sign but, as the company says 'every little helps'.

Not all are convinced. Asda hit out at Tesco's complex promotions, describing them as 'basket bingo'. ING's analysts have suggested that Tesco needs to make much deeper price cuts to stop customers switching to Asda.

Meanwhile Tesco's international business has its own headaches, with the US stores still making losses and the business in Korea hit by government regulation.

So Tesco shareholders can expect to wait a while yet before the shares recover their previous levels. But Tesco has the market and financial power to claw its way back, and I remain a patient bull.

Good run

Sainsbury's share price has had a good run over the summer, matching its sales success over the period. Up 12% since 1 June, they maybe look a little expensive at 324p, but with tangible net assets of about 290p and yielding 5%, they remain a good defensive investment.

Morrisons makes a virtue of its slowness to act. It is only now rolling out a plan for a chain of convenience stores, long after Tesco and Sainsbury. Having eschewed hypermarkets, its chief executive has recently dismissed them as "a blip on the pages of retail history". And its adventures into non-food retailing have been very specifically confined to its acquisition of baby goods retailer Kiddiecare.

Just why has Warren Buffett singled out Tesco as a rare foreign investment? You can delve into this question more in this report from the Motley Fool: "The One UK Share Warren Buffett Loves". It's free and you can download it here.

Where is the UK's leading dividend stock-picker investing today? The identities of Neil Woodford's favourite blue chips are revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".

More investment opportunities:

> Tony owns shares in Tesco but no other shares mentioned in this article. The Motley Fool owns shares in Tesco.

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Comments

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trmeer 05 Sep 2012 , 2:25pm

Tesco never needed to turn around. 20 years of continuously growing earnings and rising dividends doesn't sound like a troubled company to me. Just irrational market short-termism and hysteria as usual, hence Buffett's decision to almost double his stake in a brilliant company.

vinchainsaw 05 Sep 2012 , 2:37pm

trmeer,

Couldnt agree more. But without that hysteria there'd never be an entry point.

F958B 05 Sep 2012 , 3:01pm

Tesco were in such deep trouble that they expected 2012's profits (ignoring property transactions) to be at - or close to - all-time record levels.
If that's a company in trouble..........

lotontech 05 Sep 2012 , 5:11pm

Just a few weeks ago I found myself describing Tesco as "trendy" ( http://goo.gl/2arfa ) since which time my spread bet -- boo hiss, but it's a "long term one" -- has gone even more into profit.

The chart looks interesting right now; bursting to "break out" I reckon ;-)

TRhere 05 Sep 2012 , 5:45pm

Granted that it was an unusal profit warning, as profit warnings go. It anticipated current year earnings to meet expectations, but warned of just flat profit growth for the next financial year, and the need to increase capex to maintain the UK market position.

But it caused the shares to drop 25% and the company to have a major change of strategy. It's semantics whether you call that being in trouble or not.

Tony R

QuantumDealer 05 Sep 2012 , 7:11pm

Who is Neil Woodford again, Motley Fool?! Kindly remind me please...(!)

ANuvver 06 Sep 2012 , 3:54am

Wasn't he that bloke with Martin Clunes in Men Behaving Badly? Or the next Doctor Who. No, give me a minute and I'll get it...

I don't deny Tesco's fundamental attractions, and I'm watching. I want a few things at the moment, but I want them cheaper and reckon I might get my chance as the tide goes out.

Hey! I've just remembered - The Equaliser, right? Oh, no that was his brother Ed. As you were.

DrFfybes 06 Sep 2012 , 12:42pm

Morrisons might have slipped 3% since Jan, but they seem to have made it back today.

FWIW I bought Tesco on the dip, and Morrisons at about the same as today's price, but oddly enough I do nearly all my shopping in Sainsbury's.

GoldenSoldier 06 Sep 2012 , 10:39pm

I find it a coincidence that this article should appear now. I had thought that there had been a significant improvement in customer service since December. However, today, 6th September, many were complaining about the long queues at the checkouts in my local store (S W London) and were again talking about taking their custom elsewhere. I don’t know why it has got bad again but I hope this is only a temporary blip.

GS

jaizan 07 Sep 2012 , 9:51pm

There's a lot of work to do yet. In Milton Keynes, they still haven't realised customers like the shelves to be stocked and the same customers don't like waiting to be served. Why wait to give your money away?

Half the time there's even some stupid problem with the self service tills. Like some of them not accepting cash, or even a whole block of them closed off.

Robert1963 09 Sep 2012 , 12:28pm

i agree guys there is a long way to go with customer service, they have to put this above everything else and as soon as they do that the rest will take care of its self as word of mouth will get customers back in store and online, thinking about buying some morrisons but holding off for a month or so as have a feeling markets are going to go south pretty soon.

johanbernard 09 Sep 2012 , 5:17pm

I agree with the above. Markets will probably go south soon, but Tesco is cheap at any price below 350. Buy some now at 340 and buy more at 320 or lower. Either way, you are betting on a good horse. In a year's time it should be above 400 and flying. I think Buffett might have the same idea. I have never heard of Woodford. Does he give good tips apart from dumping Tesco?

OmoOduduwa 09 Sep 2012 , 10:02pm

Thanks Johan. I will consider TSCO cheap at 280p not 350p!

There is no doubt that market will go south (so you can keep the probably) and great shall be it's fall.

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irfan12 29 Mar 2013 , 10:21am

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irfan12 29 Mar 2013 , 10:22am

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