What the analysts say: Tesco again faces questions in City
Analysts advise to 'hold' following Tesco's disappointing Q3 results
Tesco this morning (9 January) revealed a disappointing drop in like-for-like sales over Christmas and New Year. The retailer attributed the decline in sales to "further weakness in the UK grocery market" and having a "tougher comparative" versus last year. The results had a negative impact on share recommendations, although some analysts highlighted areas for optimism, including Tesco's work online.
Bernstein Research analysts Bruno Monteyne, Richard J Clarke and Rupert Galway-Cooper
"In the UK this represents the worst like for likes that Tesco has reported in recent years; Tesco are attributing this to a 'weaker grocery market'; however with Sainsbury's (+0.4%) and Waitrose (+4.1%) reporting positive like for likes and Lidl and Aldi saying they enjoyed record trading, Tesco seems to be suffering more from a loss of customers to the more distinctive offers at either end of the quality/value spectrum. Total UK sales fell by 0.6%, which is below expected market growth and therefore Tesco will continue to lose market share."
Shore Capital analyst Clive Black
"With respect to festive trade at Tesco, the key data points are as follows. We have decided to downgrade our recommendation from 'buy' to 'hold' as well as cutting our forecasts as UK like-for-like (LFL) sales, ex-VAT, ex-fuel and IFRIC 13 compliant, down by 2.3% and total group sales being down 1.2%. We need more confidence in the robustness of Tesco's forecasts. We need to see stronger evidence of recovery in the UK"
Panmure Gordon analysts Graham Jones and Damian McNeela
"Tesco's Christmas trading we would define as OK, with UK LFL sales declining by 2.3%, in-line with expectations, Asia LFLs at -5.9%, at the bottom end of expectations, and Europe LFL of -1.6%, better than expected. Tesco maintains it sees its full-year trading profit within a still fairly wide range of expectations, and although we are slightly below consensus we think it is prudent to trim our 2014 forecast by a further 1% today, although leave our 2015 forecast unchanged. We maintain our 'hold' recommendation and 320p price target."
Fabienne Caron, Kepler Cheuvreux
"Tesco does not give out the food LFL unfortunately. It tends to give it out when it is positive only. Abroad the performance in Europe is better than expected at -1.3% LFL. In Asia, in contrast, the performance is below our expectations with -5.9%, as the small improvement in South Korea was offset by weakness in Thailand. At the time of Q3, the company wrote 'we are performing in line with market expectations for the full year". It now writes "we now expect to report FY results within the range of current market expectations'. The wording is slightly different to Q3, which highlights to us that the profitability seems more under pressure."
Hargreaves Lansdown Stockbrokers head of equities Richard Hunter
"Tesco for the moment remains a 'jam tomorrow' stock, although there are clear signs of progress being made. The company is well positioned in its multi-channel offering, where online sales, including via mobiles, grew strongly and where its click-and-collect service proved very popular. Strategically, the group is complementing its online presence with a more concerted move towards smaller express stores and the run up to Christmas brought a record trading day. Less positively, the discount retailers have now loudly announced their arrival, whilst Tesco's ongoing investment in its overall revamp and transformation programme continues to impact profitability. The consequence is that whilst it can be seen that eventual progress may be made, the meantime market consensus for Tesco is no more than a hold."
Conlumino Retail Consultant George Scott
"The grocer continues to be negatively impacted by difficult trading conditions in a market where volume growth has become increasingly difficult to achieve, amid weak consumer demand and a flight towards smaller retailers at the value and premium ends of the spectrum. While positive strides are being made, particularly in relation to stores and product, this update will only intensify scrutiny of CEO Philip Clarke's turnaround plan, with the benefits yet to bear fruit.
"Nonetheless, Tesco's self-help plan is showing signs of progress in the UK. It continues to focus on providing a better place to shop through a more engaging and service-led store environment. However, it is in multichannel capability where Tesco is really making ground. Over three million online orders where made over the six week festive period, with one third of all online orders placed on a mobile device. Indeed, though Tesco's market share losses in overall grocery have been well documented, Conlumino estimates that Tesco has a share of near to 50% of the online sector."
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