Today I am outlining why Tesco (LSE: TSCO) may still be a risk too far for bargain hunters.
Retail appointments a welcome move…
The share price collapse of retail giant Tesco has been an enduring saga ever since it shocked the market with a profits warning back in January 2012. The price drop has escalated in recent months and the chain is now dealing around levels not seen for well over a decade.
Subsequent news of significant boardroom appointments has helped the retailer stem the tide of recent weakness, however. New chief executive Dave Lewis has wasted no time in shaking up the boardroom and this week parachuted in former IKEA head honcho Mikael Ohlsson as well as current Compass Group head Richard Cousins as non-executive directors.
The beefing up of the board with such retailing alumni is clearly cause for celebration, particularly as many have put the recent accounting scandal at the firm down to the lack of such expertise at the top level.
… but profits scandal still looms large
Still, investors should overestimate the appointment of such star names, with the move marking just the first step in Lewis’ revamp at Tesco.
Most pertinently, the scale of the fallout following last month’s £250m profit overstatement still has to be fully ascertained, the gravity of which has been underlined by news that the Financial Conduct Authority (FCA) is to launch an investigation into the Cheshunt firm’s books.
Also this week, Tesco suspended group commercial director Kevin Grace, the fifth executive departure since the story broke and heaping further pressure on the shoulders of embattled chairman Sir Richard Broadbent. Lewis has already warned that the current £250m estimate could come in short of the final figure, a worrying precursor of even more bad news coming out in the wash.
Competition crushing Tesco’s revenues outlook
Meanwhile Tesco’s continues to lose the battle against the competition, as budgets chains like Lidl and Aldi as well as high-end outlets like Waitrose leave the business scrambling around in the ever-shrinking middle ground.
And the impact of heavy discounting is also weighing heavily on the bottom line, a phenomenon that pushed total sales growth across the grocery sector just 0.3% higher during the 12 weeks to September 14, the lowest level since Kantar Worldpanel began compiling data more than 20 years ago.
All of these woes have driven Tesco’s P/E multiple to just 9.3 times predicted earnings for the year concluding February 2015, and which lands on the value benchmark of 10 times for fiscal 2016.
But in the absence of any clear turnaround strategy, I believe that the company remains a risky pick at even these modest levels, as intensifying industry difficulties threaten to prompt fresh earnings downgrades from the City.
