Tesco reported a 92% slide in pre-tax profits, and a 4.6% drop in like-for-like sales in the UK this morning.
Britain’s biggest supermarket chain also announced that it has overstated previous profits by £263m over recent years; chairman Sir Richard Broadbent is stepping down once the new management team led by Dave Lewis is in place.
Here’s what City analysts are saying:
Shore Capital:
Tesco has had quite a few years of challenge and disappointment. However, we can never recall a period so damaging to the reputation of the company as H1 FY2015.
That a powerhouse of international retailing was reduced to a rudder less corporate entity where downgrade followed downgrade, executive followed executive out of the business, with no effective succession planning, capped by a material accounting issue, reflects to a detrimental extent, to our minds, upon those who are the guardians of Tesco on behalf of its owners. In this respect the announcement of the commencement of a change in the Chairman of Tesco is not unexpected and we sense will be welcomed by its shareholders.
David McCarthy of HSBC:
Tesco’s problems can be summed up as Tesco having lost its emotional connection with the consumer.
This needs rebuilding by Tesco becoming the shopper champion and by behaving as a market leader. This will take time and money.
Josh Raymond of City Index
Dave Lewis is Tesco’s new CEO. He simply HAS to show his strength of leadership to steer Tesco through its worst crisis in decades.
His failure to provide a detailed strategic direction for the firm at this stage will only deepen shareholder fears and cloud the markets view of how and when Tesco can bounce back. The fact the firm is unable to tell the market what it thinks it will report for a full year is perhaps the biggest worry.
Either its own full year projection is too terrible to state (does not make sense as surely you would want all the bad news out at once) or it simply has no idea how it could perform (equally troubling!).
Nothing good in these numbers. CEO Dave Lewis is pushing out all the bad news (easier to outperform later down the line) #Tesco
— Joshua Raymond (@Josh_CityIndex) October 23, 2014
Jon Copestake, Retail analyst at The Economist Intelligence Unit.
“If Dave Lewis wasn’t considering radical action when he began in his role as CEO then he certainly will be now. A 4.4% decline in like for like sales is, in many ways, more significant than the 92% decline in profits given the investment the firm has been making to halt its decline.
The bad news doesn’t seem to have an end at present. The current decline comes as Tesco concludes an internal investigation into a £263m profit overstatement. Tesco’s like for like sales fall also comes as the firm sits bottom of a customer satisfaction survey, despite an £800m investment in better stores and services by Philip Clarke, Lewis’s successor. To top things off Lewis will have to face the future without the Chairman, Sir Richard Broadbent, who is stepping down in light of the accounting scandal.
If there is a silver lining for Tesco it is that Lewis will no doubt now have carte blanche in engineering a turnaround. As an outsider he comes in unencumbered by the firms previous mindset and has a clean slate to work from with the blame for the current malaise firmly directed at Lewis’s predecessors.
It is also worth remembering that, despite everything, Tesco still managed to turn a quarterly profit and it remains the largest retailer in the UK as well as one of the four or five largest globally. There is a precedent here, with Georges Plassat at Carrefour delivering a quick turnaround by exiting a host of foreign markets to refocus on its domestic share. Rumours are already circulating of an Asia spin off for Tesco to release funds for UK investment. This will no doubt deliver short term gains, but may be a decision that comes back to haunt Tesco (and Carrefour) in five or ten years’ time as Asian market growth continues to outpace that of Europe.”
Brewin Dolphin’s Nik Stanojevic
The lack of any strategy announcement is disappointing and management did not set a date for the strategy day. We might have to wait until the third quarter interim management statement or even as late as the full year results to get any news on this front. Management stated its three main priorities (in this order) are restoring competitiveness, protecting the balance sheet and rebuilding trust in the brand.
Looking at the divisions, UK trading profit was down 55.9% at £499m. The trading margin of 2.34% was down a massive 283bps as the leveraging effect of lower sales took hold. Clearly some kind of cost cutting will be essential when it eventually announces a new strategy. International trading profit was down 8.9% at £336m mainly due to a poor performance in Asia, down 17.2%, to £260m, with trading margins down 57bps to 5.44%. Bank profits were up 15.9% to £102m due to strong lending growth and growth in income from core banking products.
So what to do with the shares? While they are trading slightly below our DCF valuation of 174p (which we view as conservative), while the company has no strategy and while the accounting issues are still outstanding, they could trade lower still. We are also concerned with company stating that it may need to protect and strengthen the balance sheet.
Richard Hunter of Hargreaves Lansdown Stockbrokers
“Even after this classic example of kitchen sinking, it remains impossible to gauge whether today is Tesco’s nadir.
To its credit, Tesco has moved quickly to address the accounting issue, with the final figure being slightly higher than previously guided. However, the next stage of the process is a regulatory review which is a further distraction. Of particular concern are the outlook comments – on the one hand, Tesco is not providing full year guidance at all, whilst the possibility of a rights issue has not been discounted. The company is clearly prepared to take decisive steps in an effort to stem the financial bleeding, but the unforgiving trading environment and changing consumer habits will make any turnaround even more challenging.
The small positive of a trading profit which exceeded expectations has already been outweighed by the decline in margin, the previously announced dividend cut and the unsettling boardroom merry-go-round. Even prior to today’s dip, the shares had fallen 51% over the last year (and 34% in the last three months alone) as compared to a 4% drop for the wider FTSE100.
Amidst all the uncertainty, one thing is clear. The market consensus is that the shares are a sell.”
Mike Dennis of Cantor Fitzgerald
Tesco’s share price has halved since last year’s interims when the shares were 359p, and so has the profitability. Management will need to focus on UK trading ahead of the important Christmas period to make sure availability and promotional offers are executed.
The profit outlook now depends on what route Dave Lewis intends to take to rebuild sales and reconnect with its customer base and lapsed loyal shoppers. First, we believe, he needs to simplify the business via UK and International asset sales, then reconnect with suppliers by changing payment terms and lowering his cost of goods and then start on the long road to rebuilding the Tesco brand with shoppers. Tesco has the most developed multi format strategy and is well placed in the convenience market so should benefit from this growth, but will need, in our view, to redeploy space in hypermarkets to more productive use.
All this could take several years but we see some easy wins on costs and cost of goods.
