Tesco goes from bad to worse

The supermarket will report its third-quarter trading statement on 14 January and the pressure is mounting on the chain. 

Tesco apology sign
Source: Bloomberg

The supermarket will report its third-quarter trading statement on 14 January and the pressure is mounting on the chain. Tesco will reveal its annual figures in May, and traders are expecting revenue of £56.46 billion and adjusted net income of £435 million. These forecasts represent a 9.3% drop in revenue and a 43% decline in adjusted net income. The retailer will report its second-half numbers in the same announcement, and dealers are anticipating revenue of £29.24 billion, which compares with the first-half revenue of £27.22 billion.

The retailer is still having a tough time as it slogs it out in the supermarket price war. As it is trying to compete with discount chains it is severely eating into its profits. Group operating profits more than halved in the first-half, and profits at its UK & Ireland operation plunged by 70%. Revenue is slipping even though sales volumes and the number of transactions are rising; it is fair to say the customer is befitting more than the shareholder when it comes to its pricing policy.

The troubled retailer offloaded its South Korean business for £4.2 billion, which has been used to pay down debt. Reducing net debt will keep the rating agencies on side and will benefit the firm in the long run. The business accounted for 9% of group sales, but revenue was declining for the last four years as hypermarkets had restrictions in relation to trading hours imposed on them. Distressed companies despise selling assets to shore up their balance sheet, but Tesco is exiting the country at the right time.

The supermarket is still being investigated by the Serious Fraud Office (SFO) in relation to the overstating of profits in 2014, and while it is still ongoing its reputation will continue to be questioned. The company is still suffering from the string of profit warnings in recent years, and the plans to reduce capital expenditure and keep costs down isn’t enough to keep the bears at bay. 

Equity analysts are bullish on Tesco, and out of the 26 ratings, ten are buys, 12 are holds, and four are sells. The average target price is 43% above the current price. Investment banks are even more bullish on Marks and Spencer, and out of the 29 recommendations, 13 are buys, ten are holds, and six are sells. The average target price is £5.53, which is 26% above the current price.

After a strong first quarter in 2015 Tesco shares fell back into the downward trend that has been in place since November 2007, the share price has fallen 71% between then and now. The printing of lows not seen since 1997 is an indication of how much in control the bears are. There is no sign of this downward trend coming to an end.

A close below 140p would point to further declines and then the next level to watch will be 130p. The old support at 156p (provided bounces in December 2014 and March 2003) has now become resistance and the outlook will remain bearish while the stock is below his level. A close above 156p could point to further gains and resistance will be encountered at 164p and 177p, and trend line resistance will come into play at 180.5p.

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