Looking at the one-month share-price chart for Tesco (LSE: TSCO), it’s tempting to conclude that the shares have reached a period of consolidation — an inflexion point.
Inflexion points tend to get us excited because share prices can move rapidly from such formations. The trouble is that they can move fast in either direction, up or down.
Recovery potential?
Once-proud British corporate leader, Tesco’s business has hit the skids — everyone surely knows that by now. Such a high-profile firm is bound to attract interest as a potential turnaround investment, and investors from Land’s End to John O’ Groats and beyond must be poised over their ‘buy’ buttons.
Yet, Tesco isn’t the best kind of business to choose for a recovery play. Low-margin, high-volume commodity-type businesses like grocery retailing don’t lend themselves to spectacularly fast changes of fortune. With such huge revenues and costs, there’s great potential for something to go sufficiently badly to wipe out the proportionately small profit Tesco makes on each item it handles.
There’s a lot of risk, and that is why investors watch sales figures so closely, because little fluctuations in the big sales number, or in the firm’s massive costs, can lead to a large movement in the company’s comparatively small profit — that seems to be what we are seeing now. What we really need for a turnaround situation is a firm capable of generating big margins once it has itself ship-shape.
A warning from the top
Things are grim at Tesco, and I don’t just mean they have been grim, I mean they are grim and they look set to continue being grim. Get that? Grim, past, present and future.
Don’t listen to me though, listen to the new Chief Executive, Dave Lewis, who reckons Tesco’s business is operating in challenging times, and that trading conditions are tough, putting the firm’s underlying profitability under pressure. He fingers three immediate priorities:
- to recover Tesco’s competitiveness in the UK;
- to protect and strengthen the firm’s balance sheet;
- and to begin the long journey back to building trust and transparency in the business and brand.
So, according to Tesco’s own boss, the firm has no competitive advantage in its largest market, a weak and vulnerable balance sheet, no trust from its customer base and, hitherto, very poor corporate governance.
On a positive note, Mr Lewis also said that Tesco operates from a position of market strength. My goodness, the firm’s going to need to leverage every last scintilla of that advantage if it’s to grow again from here.
Tesco’s fundamental problems seem gargantuan, which is why it wouldn’t surprise me if the next move from the share price’s current inflexion point were down…