Tesco looks back on a tough year

Full-year results from the fallen titan that is Tesco will make for uncomfortable reading on Wednesday, as it gears up to report significant losses over the past twelve months.

A Tesco metro sign
Source: Bloomberg

In one sense, there should be few unpleasant surprises from Tesco in its report on its just-completed financial year. However, it is the size of the writedown on its property portfolio and associated losses that is keeping investors on edge.

Previously, losses were forecast to be in the region of £1-2 billion, but there is now a concern that this could top £3 billion and even reach £4 billion, putting the group firmly into the red for the year. The closure of underperforming stores was greeted by a rise in the share price when first announced, but the increased scale of losses would put pressure on the share price once again.

The pension deficit will be on the rise as well, as low bond yields affect returns. This is going to be the worry for later in CEO Dave Lewis’ tenure. He has begun to reverse the fall in sales, wooing back a skeptical British public that seems to have fallen firmly out of love with the huge supermarkets that were the epitome of Tesco’s dominance of the British retail landscape. Ongoing rises in the pension deficit will however mean that Mr Lewis will have to put more funds into the scheme, hitting profitability and any potential return to the hefty dividend payments of old.

The problem for Tesco is that any turnaround programme remains a major undertaking. Continuing to cut prices, or allowing other retailers into their stores to boost footfall (mini shopping malls, as it were) will help, but will also take time. Considering that the shares trade on a 24 times forecast earnings for the 2015 financial year, Tesco still looks somewhat pricy. Yield hunters can hardly be blamed for avoiding Tesco. The forward yield for the year ahead is just 0.6%, while 2016 is higher, but not by much, at 1%.

Ultimately, your view of Tesco will depend on whether you think the big supermarket model is dead or whether you believe it still has life. The small convenience stores that have sprung up across the UK are just that, convenient, but they cannot compete with the big venues for variety. There is still a place for Tesco, it is just not quite the unchallenged behemoth of the past twenty years.

Having stormed ahead in January, the shares have stalled. Indeed, they find themselves back below the 240p peak that marked the summit of progress during the first month of 2015. Key support in March was found at 231p, and any break below here following the numbers will test the (still falling) 200-simple moving average at 220p. An upside breakout much clear 252/253p, which is a resistance level running back through March and also August of last year.

Worryingly for longs, the share price is struggling to hold above the 50-week simple moving average (235p), while in this timeframe both the relative strength index and stochastics are breaking lower. Nasty surprises in the upcoming results, such as a much larger writedown could send the shares into retreat. 

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.