Tesco is “probably weaker and worse than appears from the outside” following its disappointing trading statement today, according to Dave McCarthy, analyst at Evolution Securities.
Total Tesco sales for the six weeks to 7 January 2012 in the UK rose by 3.8% and ex fuel, ex VAT like-for-like sales fell by 2.3%, against a quarter three rate of -0.9%.
McCarthy said: “This is a bad day for Tesco and for the sector. We suspect that when investors look back, that they will view this day as the day the market recognised the fundamental changes that are taking and have taken place.
“Today is Tesco Thursday. We have now entered a new era of weak/negative like-for-likes, falling industry profits and falling industry returns.
“This is not going to change anytime soon and Tesco’s situation is probably weaker and worse than appears from the outside. For example, to get store standards back to where they should be, could be a £500m bill, and there is still the quality and range issues to be sorted out, plus more price reinvestment. Tesco has been over-revving the engine for a long time and is now paying the price,” he said.
“We have written this many times over the years and investors should seldom be surprised by a profit warning – or the extent of the warning when it comes. Before profits are hit, all other measures of performance go first – sales weaken, market share is lost, consumer research turns negative, business research shows deterioration in relationships, accounting policies become stretched etc.
“This is because a company often does everything it can to hold profits up before they inevitably collapse,” said McCarthy. “This means the underlying problem is often worse than first appears and it will take longer to fix than first appears.
“We fear that this is the case with Tesco – that the problems are deeper than has been admitted today and that they will take longer to fix and be more expensive. We could see disappointing numbers beyond 2012/13 and we are unlikely to see returns targets set for 2014 being met,” he said.
“Right now, it is impossible to analyse and value the sector meaningfully as we do not have enough information. Tesco may have unveiled its broad strategy, but we know nothing about the revenue and capex [capital expenditure] investments, time scale, competitive response etc. All we can say is the outlook is not good, the timescale for recovery will be greater than suggested and that we are likely to see further cuts to forecasts in the future – for Tesco and the industry.
“This is not the end of the problem, this is the start of a new era for the industry,” he says.
Source: Evolution Securities
