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April 17, 2013

What the analysts say – Upbeat welcome to Tesco FY update

Tesco's shares slid 3.6% this morning (17 April) after the UK's largest retailer revealed a drop in annual profits and confirmed it will exit the US. The group did, however, sound an upbeat note on the performance of its domestic business, which saw sales increased by 1.8% and reiterated its commitment to becoming "the best multichannel retailer". Here, analysts give relatively positive opinions on today's trading update.

Tesco’s shares slid 3.6% this morning (17 April) after the UK’s largest retailer revealed a drop in annual profits and confirmed it will exit the US. The group did, however, sound an upbeat note on the performance of its domestic business, which saw sales increased by 1.8% and reiterated its commitment to becoming “the best multichannel retailer”. Here, analysts give relatively positive opinions on today’s trading update.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers

“Tesco has given investors mild indigestion today, with results which are laden with singular but significant costs.

“The bill for the UK turnaround, US exit, goodwill impairment in Poland, the Czech Republic and Turkey … all provided significant headwinds and have eaten into profits. Meanwhile, the strategic return to a UK focus is progressing but will be a slow process before the company can hope to recapture its former glories. Given the sheer volume of costs, Tesco has done well to turn a profit at all, and has at the same time marginally exceeded expectations. The company’s new focus on a multi-channel approach, accompanied by its revitalising both stores and staff, provide strong building blocks for future prospects.”

Neil Saunders, managing director of Conlumino

“The big number in today’s results is profit, which is down by a whopping 51.5% on last year. In large part this is down to a series of one-off items, including a write down of the value of the UK property portfolio amounting to some £804m. This in itself is notable as it arises from a decision not to build new stores on more than 100 sites that the company owns and once intended to develop. In essence, this signals the beginning of the end of the grocery space race. 

“The decision to abandon the Fresh & Easy venture cannot have been an easy one. That it has been made is a credit to Phil Clarke and his team as it underlines their willingness push through the tough measures needed to put the group back on track. While over the longer term Fresh & Easy could have become a profitable venture, it is clear that there were no shortcuts to success and creating a sustainable business was would have required a great deal of time and capital. Arguably, at this point both of these resources are better directed at Tesco’s core business where returns are much more certain and can be delivered over a shorter period of time.”

Darren Shirley, Shore Capital analyst

“These somewhat mellow headlines mask a year of considerable underlying progress for Mr Clarke and Tesco to our minds. A lot of what we believe to be good and necessary work has been undertaken over the last 18 months, the fruits of which we expect to be harvested over the next five years by customers and shareholders. In some respects, Mr Clarke has had to go backwards to move forwards, reflecting to our minds a more challenged business and more challenging market conditions than his predecessors faced. To his credit though, he has not shirked difficult decisions that we believe have been necessary to right the ‘good ship’ Tesco.

“We repeat our central view that if Tesco does not have a stable and competitive UK business then the rest of the group cannot counter-balance this weakness and Tesco’s shares will struggle to progress, hence it is an essential priority.”

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