Tesco steadies ahead of earnings

The world’s third-largest retailer, Tesco, has been in the eye of the storm in recent months with a drop of over 40% in the share price during the past 12 months.

Tesco Metro sign
Source: Bloomberg

Sales have fallen dramatically – some 3.6% in the 12 weeks to October 12 sending the market share to 28.8% - a massive decline from the 30% a year ago.

The emergence of the discount supermarkets during the height of the recession has become a thorn in the side, and one could say that the powers that be at Tesco became rather complacent during this time. Customers have changed their shopping habits and failed to return. This is apparent when you look at Aldi’s sales which have surged 27% over the past three months.

News that the company had overestimated earnings by £250 million sent investors running for cover, and saw the share price flounder below the 200p level to an 11-year low.

Warren Buffett, a major shareholder, is reportedly selling down his stake which has clearly not helped the stock price to find a bottom.

There is an ongoing investigation into the accounting error, and it is understood that a small group of key stakeholders may have misled the auditors in a bid to massage the financial reporting numbers.

Details will be released this Thursday in respect of this scandal, and it is expected that ‘inappropriate behaviour’ rather than ‘accounting error’ will bear the brunt of the blame.

Tesco is expected to report trading profits of roughly £850 million for the six months to the end of August.

We could well expect to see some write-downs and potentially some asset selling in a bid to address the current balance sheet issues and the sliding market share.

Adding to income investor woes is the paltry interim dividend which has been slashed by 75pc to 1.16p per share.

While below the 200p marker there is still a bias to the downside, and although the stock price has seen some upside over the past number of trading sessions the company remains in a state that lacks resolution and a coherent strategy.

The trend for now is down and only a clear plan dictated by a renewed management which includes assets sales will attract the value investors back.

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