Tesco treading lightly

The food retailer will announce its December sales and revenue report on Thursday 8 January. 

Tesco shop
Source: Bloomberg

Traders are on tenterhooks ahead of the update from Tesco as the company is expected to announce an overhaul to its strategy for this year, as well as reveal the December sales figures. It could be make or break for the troubled supermarket. Dave Lewis, CEO, was fast tracked to the top job in September in order to bring stability to the struggling retailer. Mr Lewis is anticipated to announce job cuts and possibly asset stripping tomorrow.

The credit rating agencies are keeping a close eye on Tesco’s balance sheet, and there is speculation blinkbox could be disposed of in order to free up capital. The dividend was slashed by 75% last year, but the belt-tightening won’t stop there. Other assets that could be put up for sale include Tesco Bank, which could be offloaded via floatation.

The largest retailer in the UK has had to contend with declining consumer sentiment and increased competition from deep discount supermarkets, but that is only the tip of the iceberg. Tesco had a disastrous 2014, in which it announced four profit warnings in six months. The supermarket group stated that full-year profits would not exceed £1.4 billion, which is approximately 26% below market estimates.

The Serious Fraud Office is still investigating the overstatement of profits, and the government body will interview a number of employees who were linked to the company’s accounting practices. We are expecting to hear from the SFO early this year, and I fear this will overshadow any reorganising Mr Lewis has planned.

A number of high profile shareholders in the firm, such as Aberdeen Asset Management and Warren Buffett, have reduced their stake in the company, and if the retailer can’t regain the confidence of institutional investors its share price growth will be limited.

Dave Lewis is focused on beefing up the balance sheet and improving the company’s competitiveness but most importantly he needs to enhance transparency. If dealers are not confident in the figures the firm reports, everything else is immaterial.

Tesco will report its full-year figures in April, and dealers are anticipating revenue of £61.59 billion and adjusted net income of £998.8 million. These estimates represent a 3% decline in revenue and a 61% decline in adjusted net income.

Investment banks hold a bearish view on Tesco, and there are 26 recommendations attached to the stock. Sevens are sells, 15 are holds and only four are buys. The average target price is 178p, which is marginally below the current price. As I previously stated, equity analysts hold an even more bearish outlook for Sainsbury’s.

Tesco shares are receiving support from the 200-hour moving average at 180p, and if this level is breeched the next level of support is 160p. If December’s sales figures exceed analysts’ estimates, like Sainsbury’s did today, the share price could target 200p.

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