My ardour for Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has cooled lately, but I haven’t given up on it altogether. Here are five reasons why Tesco still merits a little love.
It is trying to Build a Better Tesco.
It’s amazing how quickly a company can go from hero to zero. One minute, everybody was swooning over Tesco’s global domination plans, the next, they were mocking its scruffy stores and unfriendly staff. But management is fighting back, tempting customers back with family friendly coffee shops and chain restaurants. Sales in its “refreshed” stores have since increased by between 3% and 5%, with margins up as well. Tesco is listening to customers, spending tens of millions revamping its Finest range, after complaints that it was tired. The Build a Better Tesco strategy will take time, but it is targeting the right problems.
It is starting to win online.
Online grocery sales are set to double to £11.1 billion by 2017, according to the Institute for Grocery Distribution. Tesco looks like it has cracked the online grocery model, with strong growth of 13% in the UK and 54% overseas over six months. It now offers online groceries in 50 cities across nine different markets outside the UK.
You can’t keep a good grocer down.
Tesco botched its US invasion, following the £1 billion collapse of its Fresh & Easy chain. But that hasn’t deterred it from targeting the largest consumer market of them all, China. Its £345 million joint venture with China Resources Enterprise will pioneer hypermarkets, supermarkets, convenience stores, cash-and-carry businesses and alcohol sales. Working with state-owned enterprises in communist countries is never easy, but Tesco is wise to drop its ‘go it alone’ model, which flopped in Japan as well as the US. Brace yourself for interesting times.
It’s a beast of a stock.
There is plenty to hate about Tesco, menaced by cash-strapped consumers, discount supermarkets, European underperformance (profits recently fell 67% to £55 million), falling Asian sales and a recent 23.5% drop in pre-tax profits. But it still posted 2% growth in sales to a stonking £35.6 billion recently and 1.5% trading profits growth in its core UK market. Tesco may be a wounded animal, but it remains a big beast.
The share price can’t perform this badly forever.
Tesco is down 16% over three years, 9% over two years and 4% over the last six months. That’s a lousy return for the former golden boy of UK plc. Such dismal performance demands radical management action, and that’s what Tesco has been getting. If you believe management is on the right track, now could be a good entry point. Plus you get a meaty 4.1% yield, covered 2.4 times. Better still, Tesco trades at a tempting 9.9 times earnings. There’s a reason the supermarket is sitting in the bargain racks, but it may not be there forever.