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3 things that could sink Tesco plc’s share price

Today I’m looking at the key issues that could pile the pain back onto the Tesco (LSE: TSCO) share price.

Sustained sterling weakness?

A logical place to start would be to look at Tesco’s very-public spat with Unilever last week, a fight playfully labelled Marmitegate by the country’s press.

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In an effort to cushion itself from recent sterling weakness, Unilever attempted to hike prices of its much-loved products by around 10%. Following much public outrage both companies came to an agreement on Thursday afternoon, with many claiming Tesco the victor, particularly in the PR department.

However, Unilever isn’t likely to prove the only supplier to try its luck with Britain’s supermarkets in the months ahead, particularly as Brexit negotiations are likely keep the pound under sustained pressure. The UK currency remains depressed against the US dollar, below $1.22 in start-of-week trade, and further weakness in the months ahead would appear a foregone conclusion.

And the margin issue is likely to worsen not only in the near term, as the British winter forces Tesco and its peers to import more goods from abroad, but well into 2017 as supplier currency hedging begins to unwind.

Market mayhem

As well as battling the prospects of escalating merchandise costs, Tesco’s margins are also taking a double-whammy as the grocery sector’s price wars intensify.

Latest numbers from industry researcher Kantar Worldpanel showed sales at Tesco falling ‘just’ 0.2% during the 12 weeks to September 11the best result  since March 2014.

And the Cheshunt chain confirmed that its checkout performance is steadily improving in this month’s interims, Tesco advising that like-for-like sales rose 0.9% during June-August, speeding up from 0.3% in the prior quarter.

But to suggest that Tesco is finally back would be more than a tad premature, in my opinion. The company still nursed a 28.3% drop in pre-tax profits for the first fiscal half, after all, the result of its expensive price-cutting initiatives to drag revenues higher again. And Tesco is likely to have to keep slashing its shoppers’ bills as its rivals up the stakes.

Aldi, Lidl and Amazon have all announced vast expansion plans in recent months to increase their bite of the British grocery market. And Tesco’s established competitors like Asda and Morrisons have responded to these  moves by announcing scores more price cuts across many of their major product lines.

Pricey and perilous

A giddy reaction to October’s trading update thrust Tesco’s share price to its highest since August 2015, taking total gains during the past month alone to more than 20%. But I reckon this ascent leaves the chain in danger of a significant retracement.

Indeed, it currently deals on a P/E rating of 27.9 times for the year to February 2017, far above the widely-regarded watermark of 10 times associated with firms carrying troubled growth outlooks.

Should Tesco’s mild revenues resurgence prove a temporary phenomenon — as it did back in 2014 — I would expect the supermarket’s share value to sink yet again.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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