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What Management Would Prefer You Didn’t Know About Tesco PLC

Tesco

Retail analyst Clive Black recently described Tesco’s (LSE: TSCO) (NASDAQOTH: TSCDY) latest board appointments as “a light beam of good news from Tesco in a sea of darkness”. I understand what he’s trying to say, but actually Tesco’s problem now is that everything’s been very much exposed by the light of day — information that management would certainly prefer you didn’t know.

Before I go on, I should note that Tesco is still Britain’s largest retailer and the majority of analysts expect its stock price to rise from here. As a prudent investor, however, there are some aspects of this company that you should be aware of. At the very least they are ‘red flags’ that need to be monitored.

Basic oversights

I recently went for a shop at a Tesco Metro in central London. I ended up buying a few more items than usual. There was a big queue at the check-out so I decided to go to the self-service terminals. That choice cost me at least 5 to 10 minutes. Why? Because the space the store had provided me to place my shopping bags on wasn’t big enough. Every time I made some space on the metal weight-detector for extra bags (placing earlier bags on the floor) I needed a store clerk to assist me re-start the machine. It’s a small example but the micro detail in supermarkets can affect the overall customer experience and, ultimately, revenue.

Obvious blunders

The Financial Times recently revealed the supermarket had taken delivery of a new corporate jet with an estimated value of more than $50 million. It’s this Fool’s understanding that the jet will be sold forthwith, but let’s face it, the cat’s out of the bag in terms of another poor management decision.

The iceberg problem

The Financial Conduct Authority is investigating the company’s incorrect accounts (the number crunchers were overzealous with their revenue estimates). Anyone who has spent any time as a business analyst will tell you that this isn’t a simple problem, and, more importantly, it’s unlikely that just one person was involved. While the headline misdemeanour might be simple to explain, there’s now a lot of work for middle and senior level management to restore financial credibility to Tesco. Investors are basically already aware of this — shares slipped to an 11-year-low on the news.

Investors will pay

This year Tesco reported a dividend of 0.15 pence. That’s the same as last year’s dividend. City analysts, however, now expect a 53% drop in next year’s payout.

Solutions?

As has been widely publicised, Tesco has grabbed two very senior and experienced businessmen to join the board as non-executive directors. They’ll clock in for work on 1 November. Unfortunately, the appointments have already been criticised. Commentators have pointed out that they both lack front-line food retailing experience. Richard Cousins currently runs a catering group, while Mikael Ohlsson joins Tesco from Ikea. This is a potential problem because City analysts say if the current directors had had even some food retailing experience, they would have been more attune to — or been on the look-out for — the accounting irregularities that were discovered. These new appointments mean there is still no food-related retailing experience on the board.

On the plus side, both men have been hailed for their expertise in cost cutting.

Uncertain future

Tesco now needs to do two basic things: restore management credibility; and bring back customers from the discount stores like Asda and Aldi/Lidl.

As it stands, Tesco has been clear about how it plans to do this. The first solution has been a management re-shuffle. The second is a new growth strategy. Described in the press as being “all things to all men”, Tesco is going to extend its tentacles out to grab consumers through more convenience stores, and lower-cost food options. It’s also going to make space for the higher end of the market.

Will it work? So far the market’s guessing it’s unlikely to do more damage. That’s a good start but any Fool can see Tesco has a long way to go. If it can go the distance, Tesco now obviously represents great value.

This share picking business can be tough. I mean, with supermarkets you've only got a few stocks to choose from, but as we've seen with some of these companies, it can be a nail-biting ride. Do you hang on? Do you get out? If it's stressful with these 'safer' stocks, what about the rest of the market?

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David Taylor has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.