Tesco shows up its diminished ambitions

The upcoming trading statement from wounded UK supermarket titan Tesco will reveal a company in the midst of a long-term structural reform programme.

Source: Bloomberg

It has been more than eighteen months since Dave Lewis took over the helm of troubled supermarket Tesco. Since then he has overseen a retreat from empire that would have impressed Harold MacMillan. The sale of the Giraffe restaurant chain and the Dobbies garden centres are just the latest in Dave Lewis’ bid to focus efforts entirely on the UK supermarket division and his drive to raise funds to cut the firm’s debt pile.

In these aims at least he is succeeding, with Tesco’s net debt down to £5.1 billion from £8.5 billion a year ago. However, the efforts have been hit by the decision to take back ownership of some of its UK stores – this helps avoid rent increases but does require significant capital expenditure, often through the issue of debt.

Tesco’s share of the UK market has declined over the past twelve months. Data from Kantar, the body that maintains a close watch on supermarkets, shows that Tesco’s market share fell from 28.6% to 28.3%; although this is still ahead of Sainsbury’s and Asda, both of which have around 16% of the market, both these two firms made up ground. One crumb of comfort may be that the German discounters Aldi and Lidl have seen their market share decline, but overall Tesco’s relative decline from its previous hegemonic status continues.

Any hint that like-for-like sales have improved over the past year could see the shares recover, although longer-term the shares are still firmly stuck in a longer-term downtrend. Tesco still looks like the most expensive of the three listed UK supermarkets, at a forward 12-month PE of 22.28, versus just 11.5 for Sainsbury’s and 17.6 for Morrisons. The lack of a dividend payout further tarnishes the picture for Tesco, with no return to a payout yet in sight.

Having clambered off the lows around 150p, the share price now needs to push on through 170p to maintain upward momentum. Further resistance is possible around 180p and then at the March high of 200p. Any slump below 150p would raise the prospect of much more downside to come. 

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