Tesco PLC: Opportunity Or Threat?

Tesco PLC (LON:TSCO) isn’t losing money — but it may be dangerously close to doing so…

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last week I looked at supermarket chain Morrisons, which has been down in the dumps the past year as a result of continually losing money. I suggested that investors might be in for some near-term gains if things turn around.

TescoThere are a lot of comparisons being made between Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) and Morrisons right now, but I don’t think they are justified.

Tesco isn’t losing money but it may be dangerously close to doing so, and that makes it an especially hairy bet right now, whatever temporary goodwill investors might give the latest month-old chief executive Dave Lewis in the short run.

Tesco’s story might superficially appear to be similar to Morrisons given that both stocks are down 40% in value in the past year, but that’s about where the parallels begin and end.

No Comparison

While Morrisons’ management is on top of its game, addressing its price promotions and other flaws in the business model, Tesco by contrast has trouble even retaining consistency at the top management level. It’s miles away from identifying what is wrong with the business and putting right its wrongs.

What small moves it has made in that direction appear to have been insubstantial at best and harmful at worst. Last year, the supermarket retailer sold its North American chain of 150 Fresh & Easy stores to conglomerate Yucaipa. However, that ended up costing the company £150 million, including an £80 million loan that Tesco had to extend to induce Yucaipa to buy in the first place. Worse still, it appears to have cost the retailer sales.

The reality is that there is not just something wrong with Tesco’s business, but the whole business model. Tesco, once the darling of the discount food business, has been shoved aside so hard by rivals Lidl and Aldi in recent years that it was forced to rebrand itself as a mid-market retailer and global food court. That non-strategy ended up with the North American flop. Today, its own executives don’t even know what it is.

While there has been erosion at the bottom of the company’s income statement for years, Tesco was for a while able to pump-prime its short-term sales targets due to its massive reach. Now that reach is shrinking and sales are evaporating.

In fact, the past four quarters of revenue declines have happened so rapidly that the company reported its poorest sales performance in more than 20 years last quarter.

In the penultimate half-year period, sales dropped 0.5%; then, in the 26 weeks ending February 2, they dropped another 1%. On June 4, the company said that quarterly sales plummeted 3.1%. There could not be a clearer sign of an accelerating trend underway. 

tesco2Retail Roulette

Since last month when Philip Clark was ousted from pole position, there is some hope that Tesco’s new boss, an ex-Unilever honcho who’s accustomed to dealing with business models that straddle multiple consumer product complexities, might make amends. But so what?

On a five-year basis, while earnings are down 65%, the stock is only off 41% anyway, suggesting there is much further to fall. When there is such a clear path of sales and earnings declines combined with a revolving top management team trying to figure out what’s going wrong, who wants to take that kind of risk for a short-term bump that’s akin to retail roulette?

It might end up that David Lewis’s big move is selling the company in chunks and slices to various cash-rich buyers, by which time Tesco will be unrecognisable all together. In which case, if you’re a private equity fund manager, you should give Lewis a call; but otherwise, just forget about Tesco altogether.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »