It’s been a grim few years for the once seemingly unstoppable juggernaut Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US). The UK’s number one supermarket has posted earnings declines for two years running, and is forecast to extend the losing streak to three.
Presiding over Tesco’s unprecedented period of pain has been Philip Clarke, who succeeded Sir Terry Leahy as chief executive in March 2011. Tesco’s shares were trading at 400p when Clarke took up his post. Today, they trade at under 300p.
Performance timeline
Poor trading over Christmas 2011 highlighted problems with Tesco’s core UK business. In its annual results announced in April 2012, Tesco said it would be investing £1bn over the year, refreshing stores and recruiting more staff.
Clarke said: “As we improve the shopping trip for our customers, it will follow that our sales growth and financial performance will improve, too”. He added that the £1bn investment would “constrain our near-term profitability”, but that he was still “confident of making modest progress this year”.
When Tesco announced its results for the year, in April 2013, Clarke reported a 14% decline in earnings per share (EPS). Nevertheless, he claimed: “Our plan to ‘Build a Better Tesco’ is on track”.
Another year on and another set of annual results, announced in April this year, saw Clarke report a 7% decline in EPS and confess: “Our performance in the year was not where we had planned it to be”.
Finally, in a first-quarter trading update earlier this month, Tesco reported its worst sales decline in 40 years. Analysts are forecasting EPS will dive 18% this year.
Shareholders are getting restless
Legendary billionaire investor Warren Buffett, who upped his stake in Tesco to 4.8% after the company issued its profit warning, reduced his interest to under 4% after last year’s first-half results.
Increasingly, we’re reading reports of unrest among major shareholders. A lack of vision, tardiness in pulling the plug on Tesco’s loss-making US operation Fresh & Easy, and losing some of the company’s smartest people in management shake-ups are among the accusations that critics say show Clarke isn’t up to the job.
Pressure is building
“Beleaguered boss” and similar epithets are now being routinely attached to Clarke’s name, and his pleas for more time and insistence that he won’t walk away from the job are reminiscent of David Moyes’s ill-fated season at Manchester United. Like Moyes, Clarke may have the decision made for him…
If time is called on Clarke’s tenure, you can be sure that Tesco would be able to recruit a new chief executive from among the very best. What top exec wouldn’t fancy the task of leading one of the world’s biggest retailers?
In such a scenario, I’d expect to see Tesco’s shares make an immediate upward shift. The fundamentals won’t have changed, of course, but sentiment surely will. Furthermore, if you believe, as I do, that Tesco is capable of being put right, a share price surge could be just the start of a long, rising trajectory back to former glories.