Although Tesco said that it was making good progress on its turnaround plan despite a tough consumer backdrop, UK like-for-like sales nevertheless fell by 1.5 per cent in the quarter.
Of course, it would have been unrealistic to expect chief executive Philip Clarke’s six-point plan to “Build a Better Tesco” to have yielded immediate results. But the update also brought worrying signs that overseas growth was grinding to a halt – international like-for-like sales climbed just 0.5 per cent, as the effects of the Eurozone crisis and a slowing Chinese economy continued to be felt. Further questions over how quickly the US business, Fresh & Easy, can make a profit were also asked as like-for-like growth there slowed from 12.3 per cent in the fourth quarter to 3.6 per cent.
One thing’s for sure, and that is that there will be no instant return to form for Tesco. As analyst Philip Dorgan at broker Panmure Gordon notes, “turning Tesco UK around is all about doing 1,000 things 1% better”. For an organisation of Tesco's size, that's a lot of work, and in the meantime we still think there are better investment opportunities elsewhere. Hold at 301p.
Clive Black, Shore Capital - HOLD
For the ‘uber bears’ there is no warning, which is an important foundation to the rebuilding of Tesco’s investment credentials whilst for the ‘uber bulls’, if there are any, there isn’t enough evidence to suggest that earnings are on an upward path for the medium-term corresponding with rising ROCE. We are encouraged that there are signs of stabilisation at Tesco UK after sustained under performance, although with all the attention and resource a further deterioration would have been somewhat calamitous, whilst established International markets are proving a little more robust than we expected, the USA excepted. We must first start to rule out further downgrades and warning possibilities before we become carried away with upside momentum for the stock in the near-term. In this respect, the Q1 update from Tesco may help.
Sam Hart, Charles Stanley - HOLD
We think Tesco has a credible plan in place to revive its underperforming UK business, but the process is likely to be a protracted one. There is also a material risk that significant additional investment could be required in the UK business beyond the £1bn already announced. We would not rule out the possibility that UK operating margin has to be rebased downwards again over the medium term. The current valuation suggests these risks are probably largely discounted, but the shares are unlikely to perform until clear evidence emerges of an improved like-for-like sales performance relative to peers. Our recommendations remains at Hold.
Freddie George, Seymour Pierce - HOLD
We continue to believe that Tesco is still a strong business with an unassailable market leading position in the UK that has temporarily come off the rails. Management, in our view, should not change its strategy significantly either in the UK or overseas. It makes sense to invest more in service and in the ranges, particularly in fresh produce, but we do not believe management should be forced into selling overseas operations or its banks subsidiary. Nevertheless it is hard to see anything other than pedestrian earnings growth from the company over the next three years. UK profits are unlikely to grow while the company has to invest in its proposition to defend market share and overseas, which still only accounts for c. 25% of operating profits, will not significantly move the dial.
Nick Bubb, independent
The Tesco recovery story has got off to a slow start, with Q1 LFL sales still down in the UK, by the expected 1.5%. But the period of the 13 weeks to May 26th had tough April comps and missed the key Jubilee Week, so Tesco insist that things have gone to plan and that the momentum of change in the business is accelerating, eg with an extra 500 stores just recently getting extra staff and new product ranges coming in etc . All eyes are now on what Sainsbury will say on Wednesday, but Tesco seem to have Morrisons and Asda more in their sights...On the conf call at 8am, there were questions about the poor performance of the Bank and the Fresh & Easy business in the US, but Tesco brushed these aside, pointing to timing issues etc.
Richard Cathcart, Espirito Santo - NEUTRAL
Overall a reassuring statement which shows that management’s plan is on track, although in our view we are not yet seeing the concrete signs of improvement that would drive a re-rating of the shares. We still do not know how management will measure the success of its plan – will industry-average LFLs be enough, or is the plan intended to raise Tesco back to LFL leadership? Either way we think there is still a lot to achieve and as the year progresses management will have to show hard evidence that consumers’ perceptions of the Tesco offer are improving. The shares are trading on 9.4x our cal.2012e EPS (excluding property profits).
Philip Dorgan, Panmure Gordon - BUY
While these numbers are not good, they are in line with company expectations and there is no change to profit guidance. The UK performance will look poor relative to Sainsbury (which is due to report on Wednesday), not only because the period covered does not include the Diamond Jubilee for Tesco, while it does for Sainsbury. The bears will devour this continued underperformance but, in truth, we are not expecting a swift rebound. We do, however, think that Tesco is fixable and that 9.0x trough earnings is a good entry point for the shares. Tesco has some great assets, a strong multichannel platform and significant balance sheet strengths.
