Today I am looking at why Tesco (LSE: TSCO) could pay off handsomely for risk-tolerant investors.
Here are two numbers that I think help make the case.
3.6
According to latest Kantar Worldpanel statistics, the increasing fragmentation of the British grocery space and the impact of heavy discounting continued to weigh on Tesco, and sales dropped 3.6% during the 12 weeks to October 12.
Although news of the discounters eating up even more ground — Aldi and Lidl saw till rolls advance around 27% and 18% respectively during the period — should hardly be greeted with fanfare, the latest numbers suggested that Tesco may have put the worst of the sales rot behind it.
Indeed, the results prompted Kantar’s head of retail and consumer insight, Fraser McKevitt, to comment that “[although] Tesco is yet to see substantial improvement… it seems it may be turning a corner as sales are down 3.6%, which is the grocer’s best figure posted since June.”
The figures are certainly a huge improvement from turnover declines of 4% in the August update and 4.5% in September, suggesting that the Cheshunt firm may finally be fighting back in an increasingly competitive marketplace.
24
As encouraging as Tesco’s improved sales performance may be, the business still has plenty of heavy weather to plough through as widescale streamlining — including the touted sale of non-core assets — and a move away from its hulking megastores model takes time to bed in.
Indeed, City analysts expect the business to punch a gigantic 46% earnings decline for the year concluding February 2015, a scenario that would mark the third successive annual decline. Still, for patient investors Tesco’s moves into online and convenience channels could prove pivotal in wresting the initiative away from the discounters and powering profits growth.
And research house IGD illustrated the importance of the grocers adapting to changing consumer trends last month when it estimated that the convenience sub-sector will account for 24% of all food sales by 2019.
A weaker balance sheet is forcing Tesco to slash capital expenditure in the near term. But the outperformance of its smaller Express and One Stop outlets — like-for-like sales here rose 0.8% during March-August, comparing starkly with the 4.6% decline across all of the group’s stores — is keeping investment in the high-growth convenience store space ticking higher, a critical step for future earnings growth.