Tesco’s (LSE: TSCO) share price has by slumped almost a third in 2022. And it’s down 25% in the past six weeks alone.
Following the herd isn’t something that I, as an investor and financial writer, endorse. But when it comes to Tesco shares, I’m happy to accept this strategy. Here’s why I think the company’s too dangerous to invest in today.
1. Sinking consumer spending
Food retailers like Tesco could be relied on to generate stable earnings at all points of the economic cycle. This is what has made them such attractive propositions during tough periods.
The scale of this cost-of-crisis living means that not even the grocery specialists are safe however.
This is why Tesco’s advised that full-year adjusted operating profit will likely register at the lower end of its £2.4bn-£2.5bn guidance. It said on Wednesday that ”significant uncertainties” concerning consumer behaviour exist.
2. Rising competition
Growing strain on shoppers’ budgets means they are flocking to low-cost operators like Aldi and Lidl. These chains are rapidly expanding too, raising the pressure on the Big 4 operators to slash costs.
And Tesco is the biggest loser in this rush to value. According to trade paper The Grocer, it’s lost around £57m worth of sales to Aldi alone in just three months.
So the business is having to keep rapidly slashing prices at the expense of profit. It announced this week plans to freeze prices on “more than a thousand everyday products” until 2023.
3. Soaring costs
Supermarket margins are notoriously wafer thin. And right now they are caught in a vice. As well as being impacted by price cutting, Tesco et al are being hit by a sharp rise in costs.
Tesco’s adjusted operating margins at its retail division crumbled to 3.9% in the first half, down 0.7% year on year. This caused adjusted operating profit at this core unit to tank 10%, to £1.25bn.
The business is fighting soaring costs in a number of different areas. And it’s highly uncertain when the situation will get better. These include:
- Labour costs. Tesco is about to hike basic pay for its store employees for the third time in just over a year. Staffing shortages across the industry and soaring inflation means this could be a long-running problem.
- Sterling costs. Supermarkets import vast amounts of goods from abroad. As a consequence, they are facing increasingly-hefty currency-related expenses as the pound sinks.
- Product costs. Prices of food and non-essential goods continue climbing as the Ukraine war drags on and supply chain issues elsewhere persist.
I’d avoid Tesco shares
One saving grace I see for Tesco is its market-leading internet operation. When it comes to online grocery, it commands an impressive 39.6% market share. The steady growth of e-commerce should provide solid revenues opportunities in the years ahead.
However, I feel this positive doesn’t offset all the other woes the business faces in the near-term and beyond. Tesco shares are cheap — they currently trade on a forward P/E ratio of 9.7 times — but I won’t touch the FTSE business with a bargepole.
