Why Tesco PLC Isn’t Yet Down For The Count


It’s perhaps fanciful to expect a retail heavyweight to hit the canvas after sustaining one solid body blow.

Almost two years ago Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) issued its first profits warning in a generation, causing newly minted CEO Philip Clarke to remark “what doesn’t kill us makes us stronger”.

Darkest before dawn?

Like-for-like sales at Tesco fell 2.4% during the Christmas period, with shares going down 4%. The blame for this was partly attributed to a “weaker grocery market in the UK”.

It isn’t just Tesco struggling with Morrisons also revealing weak trading over Christmas. In fact, the only one of the big four supermarkets to hold onto its market share was Sainsbury’s, who managed to resist the pressure from upmarket rivals as well as discounters.

With a 29.6% market share, Tesco is still the market leader — but while Aldi, Lidl and Waitrose all saw massive sales increases, we have to ask how the company is poised to deal with these threats.

Up to the task?

There are many reasons a company can falter. Management can become stuck in a rut and, when new problems arise, they revert to old responses. This is known as ‘active inertia’.

During Sir Terry Leahey’s reign, the company was accused of not being outward-looking enough. His replacement, Philip Clarke, is a lifelong Tesco employee so you may wonder if he’s capable of inducing radical change?

A gamble pays off

An ace up Tesco’s sleeve is the Hudl tablet computer. Released last September, its sales totaled 400,000 by the end of the year. Unusual for its price point, the Hudl impressed critics by being well built, featuring a clear HD screen and a speedy processor. An updated version of the tablet will be released this year.

More than the product being an end in itself the Hudl is an entry point through which consumer homes can visit Tesco’s digital services. These services include Tesco’s online grocery store, the Tesco Direct store, Tesco’s F&F clothing store and Tesco bank account access.

Clarke is calling this Tesco’s “multi channel” strategy, and if you’re a long-term investor in Tesco, current low market expectations could see a turnaround as Tesco’s digital services continue to gain a foothold.

Value for money

With a dominant market share and a capacity to innovate I believe there are reasons to like Tesco. At 329p a share, it’s near to an all-time low and could prove a bargain.

Tesco is one of five shares we think you could retire on, but even if you don’t like the sound of Tesco as a value investment, why not read our free report in which the other four options may be more appealing.

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> Mark does not own any shares in Tesco. The Motley Fool owns shares in Tesco.