Today I am explaining why I don’t think investors should give shares in Tesco (LSE: TSCO) and Morrisons (LSE: MRW) the time of day.
Battered from all quarters
The biggest threat facing the middle-tier of Britain’s grocery space is the progress made by discount chains such as Aldi and Lidl. Latest Kantar Worldpanel data showed revenues at these outlets leap 32% and 20% year-on-year during the 12 weeks ending 20 July, comparing starkly with the 3.8% decline posted at both Tesco and Morrisons. And aggressive expansion strategies by the likes of Lidl over the next year and beyond threatens to…
Battered from all quarters
The biggest threat facing the middle-tier of Britain’s grocery space is the progress made by discount chains such as Aldi and Lidl. Latest Kantar Worldpanel data showed revenues at these outlets leap 32% and 20% year-on-year during the 12 weeks ending 20 July, comparing starkly with the 3.8% decline posted at both Tesco and Morrisons. And aggressive expansion strategies by the likes of Lidl over the next year and beyond threatens to exacerbate the problem.
In a bid to stymie the impact of the discounters, Tesco and Morrisons have been dragged into a bloody price war, which threatens to derail the bottom line even in the event of rising activity at the checkout. To add to the problem, J Sainsbury stole a march on its mid-tier rivals by announcing plans to reintroduce the Netto budget chain back to the UK in the coming months.
But Tesco and Morrisons are also facing pressure from above, as premium outlets such as Waitrose steal custom from less price-conscious customers — indeed, Waitrose saw revenues rise 3.4% during the latest 12-week period, according to Kantar.
Earnings woes crimp dividend prospects
One of the main attractions of Tesco and Morrisons, in my opinion, is the bumper dividend yields still on offer. Latest forecasts indicate that although both firms are set to endure colossal earnings drops this year, a situation likely to prompt a dividend cut for Tesco, anticipated payments still create monster yields of 5.2% for Tesco and 7.7% for Morrisons. These figures knock a forward reading of 3.2% for the FTSE 100 clean out of the park.
But with enduring sales weakness expected to translate into heavy earnings woes — Tesco and Morrisons are predicted to punch declines of 20% and 51% in the current year alone — questions rage over how long the chains will be able to keep dividends rolling at these levels.
Musical chairs at the top fail to convince
Tesco announced in this month’s interims that chief executive Philip Clarke will be replaced by Dave Lewis, President of Unilever’s Personal Care division, from the start of October. Although the incoming man’s expertise in emerging markets will undoubtedly assist the supermarket’s expansion in Asia, the incumbent will have to pull rabbits out of hats to turn Tesco’s performance in its UK markets around given the shifting structural landscape.
If company veteran Clarke was unable to stop Tesco’s decline, questions have to be raised over whether Lewis’ installation at the helm can do so. Rather, the entry of the new man could potentially cause further hiccups for the firm’s already-spluttering recovery plan as new ideas are brought onboard. Until both Tesco and Morrisons begin to show even the slightest signs of turnaround, I believe that investors should give both stocks an extremely wide berth.
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Royston Wild has no position in any shares mentioned. The Motley Fool owns shares of Tesco.