Tesco PLC Faces Its Very Own Black Wednesday

TescoAmazingly, I’ve made money from investing in beleaguered retail giant Tesco PLC (LSE: TSCO) over the last couple of years. Not many people can say that. And if analyst predictions are proved right, even fewer people will make that boast in the weeks ahead. Tesco is set to deliver its first-quarter results on Wednesday, and forecasts suggest it faces its very own Black Wednesday.

Not that I expect the share price to plummet. Given the dismal predictions, anything less than outright meltdown will be viewed positively, and the stock could even rise on the day. Tesco will certainly have to go some to prove the doom-mongers right, with JP Morgan predicting its figures will be the worst in 15 to 20 years. And they’re not alone.

Back On Black

Clive Back at Shore Capital has never been this gloomy about Tesco’s prospects. “We believe Tesco UK is increasingly perceived by customers as simply too expensive versus the discounters, Asda and potentially Morrisons. That is a dangerous and frankly untenable place for a mass-market leader to be.” When analysts fear you might even underperform Morrisons, you are in trouble.

Tesco is subject to a chorus of broker disapproval, with Oriel Securities predicting a 4% drop in like-for-like sales, after a 3.5% drop in the final quarter of last year. And that’s its optimistic scenario. I’d go on, but you’ve probably heard enough. Tesco is in everyone’s black books.

Tesco Turnaround

Headline figures aren’t everything. What really matters is whether Tesco’s management can convince markets it has the right strategy to turn things round. Chief executive Philip Clarke is banking on his stores revamp changing things for the better. Can he do it? Building a Better Tesco campaign has been running more than two years, and the results ain’t great.

Relying on a refit programme to win back customers isn’t enough, even if you throw in a few Giraffes. Most of us choose our supermarket on price and service, and turning round negative perceptions is a long, often painful, process. Tesco can’t compete on price with Aldi and Lidl, and too many people are complaining that it doesn’t care about its customers either.

Waiting For Wednesday

Clarke has a massive turnaround job on his hands, and if Wednesday does turn out as black as expected, he will be forcing it through without the support of the City. He is also short of support at a senior level within Tesco, following fallouts with staff, notably former finance director Laurie McIlwee. I’d be more confident if the remaining three of the big four were booming, but they’re not, dropping market share in what looks like a structural decline.

Clarke is likely to come out swinging, talking up Tesco’s deal to sell House of Fraser’s products through its website, which it hopes could prove a blueprint for the future, as well as the supermarket’s online successes, plus a progress report on store revamps and price cuts. Maybe Black Wednesday will be the turnaround point. If so, today’s valuation of 9.5 times earnings, tied to a 4.9% yield, could be a great entry point.

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Harvey doesn't own shares in any company mentioned in this article. The Motley Fool owns shares in Tesco.