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Tesco PLC Shares Have Sunk To A 10-Year Low

TescoIf Tesco’s (LSE: TSCO) board thought sacrificing its leader would miraculously resurrect its share price, then it was just the latest disappointment from the company.

Last Monday, the embattled retailer announced that CEO Phillip Clarke would step down from his role at Tesco in October, to be replaced by Dave Lewis, currently President of Personal Care at Unilever.

Tesco’s share price immediately rose by as much as 3.5%, suggesting investors were happy to see the back of Clarke. But by Thursday it had slumped to a ten-year low by my reckoning – a remarkable situation given all the shocks to the stock market we saw over that decade.

Indeed, even in the midst of the financial crisis, Tesco shares only fell to 285p. Yet now we’ve seen the shares dip below 273p, even as the wider UK economy that’s so vital to the supermarket is motoring into a strong recovery.

Oh, how the mighty have fallen.

The King is dead! (Um, now what?)

There are several explanations for why the share price may have fallen after Tesco announced its boardroom reshuffle.

The most pertinent is that on the same day as unveiling its new CEO, the company delivered yet another profit warning. Perhaps shareholders overlooked this while they were toasting the demise of the unpopular Clarke, but now they’ve woken up with a hangover, and perhaps an eye for the small print.

Sober reflection has probably also reminded them that Tesco’s problems can’t just be magicked away by a new broom.

The company is still having to spend more just to keep the customers it has, even as sales slump further. That is a recipe for ever-lower profits.

Worst of all, if Tesco does face deep structural issues that some of Clarke’s initiatives were set to try to address — from the threat from Internet retailers to the declining role of Tesco’s mega-big box stores – then it could take years for Lewis to turn the company around, on top of the years that Clarke has already thrown at the task.

That kitchen sinking feeling

That alludes to another reason why I think the shares may have fallen still further after the confirmation that Clarke would soon be checking out from Tesco.

When I heard the news, I had mixed feelings. On the one hand I did find Clarke an frustrating sort of leader, and I do think he could have cut prices sooner — although I wasn’t one of those demanding all-out price warfare. It’s impossible to know what a different man or woman would have done in the same role with the same cards, but it’s fair to say I haven’t been dazzled with how Clarke played his.

Yet despite these mixed feelings about Tesco’s current boss, I was still surprised when the shares rose sharply on news of the reshuffle. That’s because even if you don’t rate Clarke, it’s hard to imagine the company would ditch its CEO just ahead of a stunning return to profitable growth.

I strongly suspect the latest profit warning is not the last, and that Tesco knows it needs a new leader to get it through the next period of miserableness.

Moreover, I doubt Lewis wants to slog through the pain of a steadily drooping share price for years to come, even if operations remain weak. So I suspect he may decide to ‘kitchen sink’ a lot of bad news with his first major report as CEO.

This is not how Clarke went about it — share price death by a dozen cuts has been more his style — but I suspect Lewis has little to lose by getting his tenure off to a forecast-slashing start.

Mix-and-match when shopping for shares

That is just speculation on my part, and even if I’m right it’s not guaranteed that such a blood-letting would be bad for the share price when it actually happens.

It’s possible shareholders could see kitchen-sinking as a sign of candour and genuine change, and reward Lewis’ boldness with more enthusiasm for investing in Tesco.

But however events ultimately play out, what it definitely does do now is introduce yet more uncertainty into the picture.

Uncertainty is never popular with investors, especially not those in big blue chip firms like Tesco, so I think the renewed weakness in the shares isn’t surprising and there may well be more on the way. Long term investors who hold on will need to hope it’s the darkness before the dawn.

In any event, what Tesco's travails reveal is that even the seemingly safest companies can come a cropper, which makes diversification a must for prudent portfolios.

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Owain Bennallack owns shares in Tesco. The Motley Fool owns shares of Tesco.