Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has had a rough time of it lately, but don’t let that put you off. Here are five ways it could make you rich.
1) By finally getting its act together
Tesco has endured several tough years, but it is working hard to turn things round. The newly opened family friendly Giraffe restaurant in Watford Tesco Extra was bright and buzzy when I checked it out. Incorporating Harris & Hoole artisan coffee shops into its stores is a decent stab at lifting the curse of the dreaded supermarket caff, with their congealed fry-ups and rows of uncleared plastic tables. At least chief executive Philip Clarke knows what’s wrong with the company (sullen service, soulless stores), which is the first step to putting things right. Early reports suggest Tesco’s modernised stores are performing more strongly. Now it needs to modernise more of them, and faster.
2) By delivering regular surprises
An operation this size often struggles to innovate and deliver happy surprises to both customers and shareholders, but Tesco managed it over Christmas, with its 7″ budget tablet the Hudl, aka ‘the tablet-that-should-be-rubbish-but-isn’t’. Retailing at £119, or as little as £60 for loyal Clubcard holders, it shifted around 400,000 units. That was one surprise, here’s another. Tesco Mobile has just announced it will launch super-fast 4G mobile at entry-level prices, giving mobile phone giants a run for their money. Proof that its brand power and deep pockets still count for something.
3) Choosing its battleground well
The internet is menacing the UK high street and out-of-town retailers, but Tesco is fighting back with a strong online presence. Its net-based sales, including via mobiles, topped £1 billion in the five days before Christmas alone. Its Click and Collect service, soon to be trialled in London Underground stations, is proving popular. Online clothing sales grew 70%. Tesco has joined battle globally, rolling out its online grocery shopping businesses to more than 50 cities overseas. It is also gaining ground on other fronts, notably the smaller, convenience store market, where Tesco Express recently posted double-digit growth. The Tesco superstore is dead, long live Tesco.
4) By seeing its customers recover
Like all supermarkets, Tesco has been clobbered by the cost of living crisis, as its customers’ wages grow at less than half the rate of inflation. There is better news on that front, with the UK now the fastest-growing major economy in Europe, following yesterday’s figures showing GDP rose 1.9%. Despite its recent decline, Tesco still takes 29.6% of every penny spent in UK supermarkets, far more than rivals Asda and J Sainsbury, at 17.1%. This gives it a bigger stake in the recovery than any other retailer. Between now and May 2015, the government will do everything to revive the feelgood factor among voters. Chancellor George Osborne’s recent hint at a big hike in the minimum wage is only the start. The rising tide should lift all boats, but especially Tesco’s.
5) By building on these bad numbers
Tesco’s numbers are certainly ugly. Its share price is down 10% over five years, against a 60% rise in the FTSE 100. Earnings per share fell 11% in the year to February 2013 and are set to plunge a further 15% this year. Yet these ugly numbers lead me to a beautiful conclusion: trading at just 8.9 times earnings, Tesco’s troubles are in the price. Better still, it now yields a tasty 4.6% a year, more than nine times Bank of England base rate. If you like to buy on bad news, now is the time to buy Tesco. Just don’t expect to get rich quick.
