Just as we thought things couldn't get much worse for Tesco (TSCO) - they have. And it's bad, really bad. Management has admitted that full-year trading profit will not exceed £1.4bn, some 20 to 30 per cent below expectations
The downgrade is reportedly down to investment in customer service, products and implementing a "new commercial approach" to rid the company of the type of unorthodox dealings that resulted in it vastly overstating its profits for a number of years. Tesco boss Dave Lewis insisted that this short-term impact on profitability was necessary to create a long-term sustainable company.
The downgrade implies that UK trading profit in the second half will be a paltry £15m - 98.6 per cent down on last year - equating to a margin close to zero, according to Cantor Fitzgerald analyst Mike Dennis. For the full year, trading profit in the UK is expected to be down by three-quarters and Mr Dennis reckons that could mean a core UK grocery margin as low as 0.8 per cent.
"The implications for the sector are significant. We could now expect little if any UK sector trading margin and a significant further reduction in J Sainsbury (SBRY), Morrison's (MRW) and Asda’s trading margins, as they all move to 'lower cost to operate models' on lower base pricing with more writedowns of existing store assets," says Mr Dennis.
Julie Palmer, partner and retail expert at Begbies Traynor, said today's negative reaction to the share price - which fell 10 per cent - showed investors are "heading for the checkout". Richard Hunter, head of equities at Hargreaves Lansdown, reckons investors have simply lost interest in waiting for a recovery story. "Market consensus remains rooted at a sell and seems likely to remain so," he adds.
But Darren Hepworth, head of global trading for TD Direct Investing, said that in under two hours trades in Tesco increased by nearly 1,000 per cent, with the vast majority of customers buying the stock. In fact, seven times as many investors chose to purchase the share than sell it - suggesting that investors think the dramatic fall this morning was overdone and may represent Tesco's nadir.
