The threats that Invesco Perpetual’s Woodford cited were not just linked to the bleak macro procure – they were specific to the business and the impact of the spending squeeze on consumers – and looking through yesterday’s results it seems the veteran investor was right to be concerned.
Shares in Tesco dropped after the retailer revealed that its progress over the 13 weeks to 23 November had been muted. Tesco boss Philip Clarke said UK sales slid 1.5% over the stretch reviewed, while outside of the domestic market, performance had been mixed.
Bright spots
The results aren’t all bad, though, and aspects of Clarke’s update that caught analysts’ eye were Tesco’s plans to continue refreshing its stores and an uptick in sales where revamps have already taken place.
Stockbroker Killik & Co said the supermarket’s brands have also been given a makeover, though its “main problem” remained halting the decline in footfall through its medium-sized stores.
Hitting a more positive note, Killik’s Jonathan Jackson, head of equities, pointed out that while Tesco is still loss making, its balance sheet remained strong. “Although the UK business has experienced a weak quarter, the group has highlighted it is performing in line with market expectations for the full-year – £3.3bn of trading profit – and it is happy with the consensus forecast for this financial year and next.”
Adding to this is a belief among many that the UK’s economy is picking up, with the OBR widely expected to revise up its growth forecasts later today in the Autumn Statement and a feeling consumers are getting a little bit richer, which should feed through to the amounts they are willing to spend.
Patience
Echoing some of these views, Hargreaves Lansdown Stockbrokers’ Richard Hunter, head of equities, said a lot of the hype surrounding Tesco’s decline is “unjustified”, even when its difficulties are taken into account.
Areas to work on, however, would be rising to the stiff competition on pricing and fending off the impact of economic challenges being suffered in some international markets.
In Tesco’s favour, though, are key emerging market opportunities, Hunter said. “The previously announced strategic joint venture in China should be a longer term boon while, from an investment perspective, the dividend yield of 4.3% should not be overlooked,” he added.
Time to stock up?
Killik said it recommends Tesco shares as a “buy”, though Hargreaves’ Hunter said consensus felt more like a “hold”, even if patient investors would eventually be rewarded.
The supermarket’s share price, which yesterday hovered around 336.5p (down 1.4% on the day), has struggled to keep pace with the wider market, having risen 6% over the last year versus an 11% gain in the FTSE 100.
Moreover, the views of analysts on Tesco vary markedly, and Hunter said this reflects the level of conviction in Tesco’s turnaround.
But Killk’s Jackson said it was hard to ignore the retailers standing globally, even if it is facing tough times.
“Tesco is the world’s largest food retailer, with annual sales in excess of £63bn…..although the UK transformation programme has further to go, the results to date have been positive, while investors are being paid an attractive dividend yield in the meantime,” Jackson argued.
