Tesco Plc Ordinary 5p (TSCO)

Company overview

Tesco Plc is an international grocery and general merchandising retail chain founded by Jack Cohen in 1919. The first Tesco store was opened in 1929 in Burnt Oak, Edgware, Middlesex. Originally specialising in food and drink, it has diversified into areas such as clothing, electronics, financial services, telecoms, home, health, car and dental insurance. It is the largest British retailer by both global sales and domestic market share. The company is now expanding its convenience stores overseas into areas such as Taiwan, Malaysia, Poland, the US and Ireland. Tesco is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

HL Comment (12 January 2012)

In a trading statement announced earlier today, (12 Jan) global grocer, Tesco reported its worst Christmas sales performance in decades, despite a high-profile £500 million price cutting campaign to attract shoppers back to its stores. The company, which triggered a price war with its promotion at the end of September, said the number of customers drawn in by its latest offer had not been enough to offset its lower prices. The supermarket group, which makes about 70% of its operating profit in Britain, said sales at UK stores open over a year fell 2.3% excluding fuel and VAT sales tax in the six weeks ending 7 January. Management warned that it would see minimal profit growth for the year as it is increasing investment into winning back shoppers, particularly in the UK.

Richard Hunters View

"The lowering of prices did drive higher sales, but the pressure on margins rendered the promotion unsuccessful. Meanwhile, Tesco's competitors had rather more success over the period, the outlook remains threatening and the company has been forced into something of a profits warning for the year. However, while disappointing, all is not lost. The international businesses continued to make a worthwhile contribution, whilst the growth in the UK of over 14% bodes well, particularly given the fact that this could become an area of further focus for the group. Meanwhile, the group's product diversification leaves it well positioned for any upturn, and the dividend yield of around 4% is another attraction.

Prior to today's decline, the shares had fallen 5% over the last three months as compared to a gain of 4% in the wider FTSE 100. The update is likely to test the patience of investors – although the drop could provide a good entry point for new buyers. We expect further analysts updates but for the moment, the market consensus of the shares as a buy remains intact. This sentiment is shared by our clients, Tesco is our most traded stock today and as at noon 99% of deals are buys."

Negative Points:

• The supermarket warned that its profits for the year would be "around the low end of the current consensus range".
• The company suggested that its spending on its promotion campaign – The Big Price Drop had not been successful.
• Tesco, which takes more than one in every ten pounds spent in Britain's shops, has been suffering more than its main grocery rivals in part because it sells more discretionary non-food goods, where shoppers have been cutting back most.
• British retailers are struggling as disposable incomes are squeezed by higher prices, muted wages growth and austerity measures, and as shoppers worry about a weak housing market and rising unemployment.
• The Euro zone debt crisis could plunge the region back into a recession.
• In addition to the other obvious pressures on UK consumers, high fuel costs continue to mean that customers have to direct some of their spending to petrol at the expense of their normal shopping commitments.

Positive Points:

• Tesco reported online sales growth in the UK of 14% across food and non-food products. Approaching one million orders were placed with Tesco Direct during the period, of which over two-thirds were collected in store.
• The performance of Tesco's international businesses was encouraging. Total international sales over the period grew at 8.2% with strong performances in all three regions: Asia, Europe and particularly the United States.
• Tesco has a strong track record of profit delivery and consistent margins.
• Tesco's increasingly diversified revenue streams and considerable geographical footprint leaves the group strongly placed, moving forward, over its UK peers.
• With over 5,300 stores in 14 countries, the grocer has been relying on strong growth overseas, particularly in Asia, to boost sales and profit in recent quarters.

Consensus:

We expect further analysts updates but for the moment, the market consensus of the shares as a buy remains intact.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.