Tesco’s (LSE: TSCO) shares might be looking cheap, but it’s a Footsie stock I’m not prepared to go on a dip-buying spree with. The broader grocery sector has been in ruder health more recently, but the UK’s biggest chain isn’t reaping the fruits of this upsurge.
According to Kantar Worldpanel, Britain’s supermarket sales rose at their fastest rate since November during the 12 weeks to 23 February (up 0.7%). But Tesco wasn’t one to benefit from this improvement, its sales dropping another 0.8% from the same 2019 period. Instead, it was the discounters Aldi and Lidl who grabbed the plaudits. According to Kantar, sales at these banners leapt 5.7% and 11.4% respectively year-on-year.
Following the herd
Aggressive expansion, major improvements to product lines, and the decline in consumer spending that’s driving demand at the ‘value’ end of the market continues to boost the German operators at the expense of their established UK competitors.
It’s clearly a case of ‘if you can’t beat ’em, join ’em’ for the likes of Tesco. And today the business announced it was extending its bid to attract customers back through its doors through fresh rounds of price cutting.
Through its ‘Aldi Price Match’ programme, Tesco will match its discount rival on hundreds of own-branded goods as well as an assortment of branded goods, such as Warburtons bread and Silver Spoon sugar.
On the ropes
It’s another sign of how far the supermarket’s star has fallen. Tesco — which not that long ago dictated the direction of the British grocery market — has been trying to cling onto its competitors’ coattails rather than being proactive and leading the charge.
It’s a strategy that, if previous attempts are any guideline, isn’t likely to succeed. Mass discounting by all the ‘Big Four’ operators over the past decade has done little to stem the charge of Lidl and Aldi. Instead, it’s a move that puts even more pressure on Tesco’s already wafer-thin profits margins.
Latest financials again illustrated the troubles Tesco is having to defend its market share. It’s had worse results, sure, but news like-for-like sales dropped 0.2% in the 19 weeks to 6 January shows customers continue to leave despite efforts to cut prices, improve branding, employ more staff on the shop floor, and the like.
Cheap for a reason
Although City analysts expect Tesco earnings to rise a healthy 8% in the fiscal year to February 2021, I think the chances of current estimates being blown off course are extremely high. As well as those aforementioned market pressures, the spread of coronavirus here and abroad threatens to significantly disrupt supply chains. This could also have huge ramifications on near- to medium-term profits.
So forget about its low forward price-to-earnings (P/E) ratio of 13.1 times, I say. Tesco’s cheap, but this is a reflection of its weakening influence in an increasingly-cutthroat market. I wouldn’t touch it with a bargepole.
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Royston Wild 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.