Tesco's brand takes another battering as its UK boss leaves and it misprices the new iPad.
This is turning out to be another week from Hell for supermarket leader Tesco (LSE: TSCO). The biggest brand in British retailing has taken three body blows since Monday -- and the week's not over yet.
Strike one: pension cutbacks
On Tuesday, the supermarket giant announced plans to lift its normal retirement age from 65 to 67. This change will affect all 172,000 members of its defined-benefit pension scheme. Predictably, this led to the UK's largest private-sector employer being criticised by trade unions and other organisations.
Strike two: UK boss to go
From a corporate perspective, this is the most shocking news for Tesco shareholders. On Thursday morning, the world's third-largest retailer announced that the head of its UK operations, Richard Brasher, is to leave the chain in July.
This is a particularly worrying development, given that Brasher -- a 26-year Tesco veteran -- took up the reins as UK boss only a year ago. What's more, it comes on the back of Tesco's first profit warning for over 20 years, which sent its shares plunging on 12 January by 55p (over 14%) to just 330p.
Brasher has already stepped down from Tesco's board and is set to leave within four months. Hence, Philip Clarke will head up Tesco's UK operations, in addition to his duties as group CEO.
This isn't the first board shake-up since Sir Terry Leahy -- the driving force behind Tesco's enormous success -- left the group a year ago, appointing Clarke as his successor. Last month, UK chief operating officer Bob Robbins stepped down after it emerged that he sold some of his Tesco stock before the 12 January profit warning.
Often, boardroom battles usually spell bad news for shareholders. Indeed, power struggles of this kind can be indicators of internal business stress or disagreement among directors. What's more, when global bosses start micro-managing individual operations, both the group and its share price can suffer.
Two possible reasons suggested for Brasher's departure are Tesco's disappointing 'Big Price Drop' promotion and weak Christmas trading, and its ongoing loss of market share to its main rivals.
Strike three: pricing problems
From the public perspective, the biggest blow to Tesco's brand this week was the news that it accidentally mispriced Apple's new iPad.
In a bizarre website glitch, Tesco Direct priced the new 4G 64GB iPad at £49.99, instead of its recommended retail price of £659. After thousands of consumers rush to buy iPads at this bargain-basement price, Tesco Direct withdrew this offer.
With iPads due to be shipped from Friday 16 March, the supermarket has refused to honour orders at the sub-£50 price. The supermarket is well within its rights to do this, as its terms and conditions include a get-out clause for mispricing before shipping.
By the way, this is just the latest in a long line of mispricing howlers at Tesco. For example, a gremlin in a BOGOF (buy one, get one free) promotion for Cadbury Mini Eggs in January saw the 100g bags priced at just a penny a bag, instead of the usual £1.50. Thanks to word spreading on social-networking websites, thousands of the Easter treats were sold before Tesco corrected this glitch.
Is Tesco in decline?
The big question for Tesco shareholders is: are its recent executive antics and pricing problems indicative of deeper problems within the UK's biggest retailer?
In particular, should Tesco owners worry about the worsening sales trend at its UK operations, which account for 70% of its business? Also, with Tesco's UK market share at its lowest level for seven years, can it return to form and gain ground at the expense of its competitors?
On the other hand, there are signs of more positive times to come from Tesco. For example, it intends to invest £400 million in store refits, as well as take on 20,000 new UK employees.
Buffett is a buyer
Personally, I remain bullish on Tesco's future performance, both in terms of its business and its share price.
After the January profit warning, famed investor Warren Buffett lifted his stake in Tesco. Having owned Tesco shares since at least 2007, Buffett bought heavily on 12 and 13 January to increase his holding in Tesco to 5.1% from 3.6%. Given Buffett's incredible record of safety-first, long-term investing, this vote of confidence in Tesco really carries weight.
Also, despite its recent troubles, Tesco remains the UK's number-one supermarket by a country mile. According to Kantar Worldpanel, it has a 29.7% market share, which is almost the same as Asda at 17.5% and J Sainsbury (LSE: SBRY) at 16.6% combined.
As I write, Tesco shares change hands at 321.5p, which values the group at £25.8 billion. At this price, its shares trade on a forward price-to-earnings ratio of 9.8 and offer a prospective dividend yield of 4.7%, covered a healthy 2.2 times.
Frankly, buying the UK's leading retailer on a single-digit PER and a near-5% yield seems a no-brainer to me, so I'd urge you to top up on Tesco today!
What are your views on Tesco? Will it bounce back or weaken further? Please let us know in the comments box below...
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