Is Tesco PLC’s Recovery Falling Apart?

Tesco’s (LSE: TSCO) recovery could be stalling. Indeed, after a good start to the year, there’s been little in the way of good news released by the company during the past six months. 

According to data research firm Kantar Worldpanel, Tesco’s sales are still falling. Management’s plan to sell off non-core assets seems to be falling apart, and Tesco’s share price has fallen back to the lows printed at the end of last year. During the past six months, Tesco’s shares have fallen 29%, underperforming the wider FTSE 100 by 15.7% excluding dividends. 

Asset sales stalling

Part of Tesco’s plan to rebuild its balance sheet and return to growth is to sell off non-core assets. Assets on the chopping block included its Homeplus Korean unit, central and eastern European operations and data analysis business, Dunnhumby. 

Homeplus has already been sold for a consideration of more than £4bn, but Tesco is pulling the sale of Dunnhumby. Analysts had expected the sale of Dunnhumby to bring in up to £2bn for the company. 

So, it now looks as if Dunnhumby will remain part of the Tesco empire for the time being. However, Tesco’s central and eastern European operations, which are also up for sale, have been valued at nearly £2bn. These operations contribute almost £6.5bn of group sales. 

If the company manages to offload its European operations, it should reduce group debt and equivalents from £20.5bn to £15.5bn, ten times new CEO Dave Lewis’s £1.4bn profit target for this year. 

Sales under pressure

Moving on from balance sheet concerns, Tesco’s sales are still under pressure as the discounters continue to eat away at the retailer’s market share. 

According to the latest figures from Kantar Worldpanel, Tesco’s market share is at its lowest level for almost a decade. During the 12 weeks to 13 September, group sales declined by 1% year-on-year.

That said, sales at Tesco’s Express convenience stores actually grew during the period studied, although the growth was not enough to offset declines across the rest of its store portfolio. 

City concerns 

As Tesco’s sales continue to decline, City analysts are revising down their estimates for the company’s earnings almost every day. For example, this time last year analysts expected the company to report earnings per share of 19p for full-year 2016.

Now, the latest figures from the City suggest that Tesco will report earnings per share of 7p for 2016. Further, during October of last year, analysts were expecting Tesco to report earnings per share of 20p for full-year 2017.  Estimates have since fallen by around 50% to 11p per share. 

Based on these figures Tesco is trading at a forward P/E of 24, a high multiple more suited to a high-growth tech company rather than a struggling retailer. City figures suggest Tesco is trading at a 2017 P/E of 15.1. 


The bottom line 

After a great start to the year, it now looks like Tesco's recovery is beginning to lose traction. And if you've run out of patience with the UK's largest retailer, our analysts here at The Motley Fool believe they've discovered a company that will make an excellent replacement for Tesco in your portfolio. 

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