The supermarket industry is one of the toughest, with intense competition both from home-grown stalwarts and aggressive foreign interlopers.
World at its feet
Once-mighty Tesco (LSE: TSCO) no longer holds sway in the way it once did, when journalists wrote articles warning of the dangers of market domination, and the ever-expanding group set its sights on conquering the world.
It still remains the UK’s number one grocer, and by quite some margin. However, that margin keeps on getting nibbled away. Its market share is a healthy 26.9%, but looks less nutritious when you see that it dropped by another half percentage point in the 12 weeks to 8 September, according to latest figures from Kantar Worldpanel.
Sainsbury’s is a distant second with 15.3%, but further erosion is inevitable as Aldi and Lidl continue to demonstrate their unquenchable thirst for growth.
Like a new football club boss, Tesco’s Dave Lewis brought in fresh ideas, cleared out the deadwood, and boosted morale, but now the early magic seems to be wearing off. The Tesco share price has gone nowhere in the past 12 months.
I’m being too hard on him though. Sainsbury’s is down 30% measured over the same period, while Morrisons is down 23%. From that point of view, Lewis is still a winner.
Trouble in store?
Inevitably, Brexit and low consumer confidence are taking their toll and, as recent political events suggest, that’s going to continue for some time. No deal is still a possibility, with all that means for import tariffs and supply chains.
Next Wednesday, Tesco publishes its first-half interims and, as online platform AJ Bell has pointed out, investors will be poring over group’s strategic plans on “pricing, product range, loyalty schemes and progress at its no-fuss Jack’s stores.” We have had almost nothing about that since the project was launched a year ago.
The good news is Tesco continues to increase group like-for-like sales, posting its 14th straight month of growth, although this is starting to look vulnerable, as the Q1 figures showed a slowdown to just 0.2% year-on-year. Comparisons could be particularly tough as last year’s World Cup and that long hot summer fuelled sales.
The £23bn FTSE 100 group currently trades at 14.7 times earnings, which shows investors still have respect for the stock. Operating margins are forecast to slip from 3.4% to 3.1%, wafer-thin for such a massive operation, but all those stores and staff are costly. Tesco is aiming to lift that to somewhere in the region of 4%. We’ll find out more on Wednesday.
Tesco still makes plenty of money, last year posting group operating profit of £2.2bn, a rise of 34%. Meanwhile, management has just generated £3.7bn from selling its mortgage book to Lloyds.
City analysts are optimistic about earnings per share growth, predicting 13% this year, 7% next year, and 10% the year after. The dividend is being steadily restored, and should have hit 3.7% by 2021, with solid cover of just over two.
As I said, Tesco operates in a tough sector and many would give it a miss. However, it looks pretty tough itself, and remains the one to beat.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.