Tesco this morning (2 October) saw its share price slide after the UK’s largest retailer revealed a sharp drop in first-half earnings. Profits in its Europe and Asia operations were down,pointing to continuing, challenging economic conditions globally. Analysts offered a mixed view of the results, but were generally positive about the work carried out by the retailer to date to improve the performance.
Shore Capital analyst Darren Shirley
“Philip Clarke, Tesco’s CEO, must be thinking about entering the Rio Olympics weight-lifting competition given the amount of heavy lifting that he has had to engage in over the last three years. Indeed, with Tesco’s interim results today, it is clear that more training is going to be required before the corporate bar feels less heavy.
“However, to be clear, we believe that he has undertaken a lot of necessary, hard and good work to date, which positions Tesco better for the future, and most critically in our view, creates the position whereby it becomes a cash generative and more shareholder friendly entity. That said the most notable feature in this update is that the performance in Europe was pretty awful.”
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers
“Tesco is spinning the strategic plates and is showing some early signs of success.
“The revamp of its core UK business is showing an average sales uplift of between 3-5% in refreshed stores, the online business remains a stable engine of growth and, further out, the Chinese joint venture should complement its already established position in much of Asia. Less positively, the economic situation, particularly in Europe, has contributed to an overall decline in sales, whilst the very nature of the business guarantees continuing pressure on margins. The emergence of the discount supermarket remains a notable risk, whilst despite its progress, the shares remain some 12% lower than the announcement of the profits warning in January 2012.
“Even so, investors are beginning to believe that the recovery story is gaining traction, whilst some of Tesco’s strategic objectives provide scope for further growth. The shares have slightly underperformed the wider market over the last year, having risen 8.5% as compared to an 11% hike for the FTSE100. Despite today’s weakness in early trade following the numbers, the recent improvement in the consensus to a buy is likely to remain intact.”
Cantor Retail Daily analyst Mike Dennis
“Tesco’s H1 results for the 26 weeks to 24th August were disappointing. The UK trading performance in Q2 was in-line at -0.0% excluding VAT, excluding petrol, versus Q1 -1% and brings into question exactly how Tesco has managed to maintain UK trading margins given costs are rising c.+2.8% and by implication sales volumes are negative.
“The profit outlook for H2/FY14E could very much depend on a positive UK LFL performance, higher gross margin and a credible explanation of how the multitude of investments in UK stores will improve the brand’s overall performance. A weak European margin is despite a total reduction in new store space costs. We will review our forecasts post the analyst meeting and review our recommendation as we fear that Tesco’s UK operations have a lot to get right if they are to hold the current margin this year.”
“By any standards Tesco is a behemoth of a retailer. As much as that has its advantages, it also means that the pace of change, especially wide-reaching change, is always tempered by organisational constraints. As such, Tesco’s well documented problems were never going to be sorted overnight. With that in mind, at this stage what its results need to show are signs that it is moving in the right direction, not that it has arrived at its final destination.
“Overall, our sense is that Tesco knows what its issues are and is actively addressing them. It will have to work increasingly hard to get the whole group back firing on all cylinders but the management capability, resources and focus are all in place to meet that challenge.”