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Where now for Tesco?

‘Celebrate’ may not be the best choice of words but Tesco's CEO, Dave Lewis, has now been in the hot seat for 100 days.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Tesco sign
Source: Bloomberg

The last twelve months, and now four profit warnings, has shown that Tesco’s management has not had complete control of the company, and the shares have suffered as a consequence. In order for this trend to reverse it will need to convince traders and investors that previous mismanagement and lack of control has been addressed, and will not be replicated in the future.

Tesco’s current plight is not of Dave Lewis’ making, but he is the one in the driving seat now and he needs to stabilise the food retailing giant. Shares in the company are now down by over 50%, and its market capitalisation has dropped by almost £13.3 billion. The reason for this dramatic fall has primarily been the four profits warnings that it has issued and the growing feeling that the management is not up to the job.

On 23 October the company announced that it had discovered accounting anomalies, and previous statements to the market regarding its fiscal state had been miscalculated to the tune of £263 million. Considering the speed with which it discovered the problem and then announced the financial costs, it is not too much of a surprise that it has had to come back to the market with a revised statement of a far greater cost.

The markets are now particularly skeptical of Tesco announcements, especially as the FSA is still investigating the incident and eight members of management are still on a leave of absence until further notice. This all smacks of an issue that is yet to be fully resolved.

Today’s statement saw Tesco downgrade its profit expectations for the year ending February 2015 from £1.94 billion down to £1.4 billion. This is another blow to investors after it announced £3.3 billion in profits last year, the third year in a row of aggressive profit de-escalation. In addition to the cost of dealing with these accounting issues, the firm has also started to increase its staff numbers with the announcement of a further 6,000 joining the 320,000 it already has.

Considering Dave Lewis has only been in the job for 100 days and has no previous CEO experience, he has had a lot thrown at him in a very short period of time. Arguably, it will only be fair to judge him on 8 January when the company announces its important Christmas sales figures, and he will have an opportunity to outline his strategy for the company.

So are we at, or near, value for Tesco?

From an income point of view the interim dividend was already cut from 4.63p down to 1.16p, and the expected final dividend is being called at 2.5p down from 10.13p last year; this does not make for an attractive proposition. This year’s capital return is even less attractive, with the year-to-date shares down over 49%. For those that have to invest in the food retail sector the alternatives are not much better, with Sainsbury’s down 34% and Morrisons down 27%.

Investor confidence is a difficult thing to gain and an easy thing to lose, and with four profit warnings in 2014 alone Tesco has its work cut out to regain it.

Certainly, technical analysts can point to the shares bumping against major support levels, but unless these looming Christmas sales show tangible improvements it might not be enough. 

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.