I recently had surgery. It was painful. It was also painful leading up to the surgery. Many aspects of my life were made to be quite difficult — even running to catch a bus was a strain. I’m technically “cured” now but it doesn’t feel like it. It’ll take some time to get back to normal.
Tesco (LSE: TSCO) has found itself in a similar situation. It looked weak earlier this year, then it looked even weaker by November. Are its darkest days behind it now though?
Check-up
Tesco is not a pretty sight as it stands. It’s got a P/E of nearly 18 times, and earnings per share of just 12 (low compared to J Sainsbury). The retailer has lost around half of its market value since the start of the year and the majority of City analysts think the stock price will stay the same or move down slightly from where it currently resides.
Tesco’s dividend yield has always been a drawcard for investors but even that is forecast to take a hit as a direct result of the company’s recent misses.
To add insult to injury, according to The Financial Times, Tesco was again the worst performer of the big four supermarkets late this year with a drop in sales of 4.2% in the four weeks to November 9.
Naughty or nice?
We all know Tesco has been naughty this year, so… no, it doesn’t deserve any Christmas presents from Santa. That said, you never know how Santa will feel on the day. Maybe that £260 million misstatement will be forgotten? That’s unlikely, but it may be forgiven.
There’s already evidence to suggest that consumers are willing to spend-up big if there’s a bargain to be had. In fact last week police were called to Tesco supermarkets following concerns that stores were in danger of becoming battle grounds as Black Friday customers hunted down heavy discounts. Police reported “over-crowding”.
Good tidings we bring
So will that demand surge happen again at Christmas time? It all depends on what Tesco has to offer. The basic dynamics, though, of the UK supermarket space haven’t changed. Consumers want convenience and affordable groceries. Tesco found a way back into the market on Black Friday by discounting heavily. I suspect it will need to do that again over the Christmas period in order to win customers back from Aldi and Asda.
Hope for the future
So let’s say Tesco decides to market its Christmas selection, and offers big discounts again… well, nothing’s changed, has it? We know that’s not a sustainable model for the retailer — it will just lose more of its profit margin. What it could do is remind customers why they used to shop at Tesco in the first place. Is that realistic?
I don’t want to kid anyone, I don’t believe Tesco will truly be able to find its feet again until real wages start to rise again in Britain. However there is a middle ground. That middle ground could be found with Tesco’s new management team. According to recent media reports, Tesco has decided to part company with Chris Bush, managing director of the UK business, as well as at least three senior executives already suspended following the revelations of the accounting errors.
It’s this Fool’s opinion that former boss, Philip Clarke, had been in the job too long. He’s gone now, and as hard as it is, it seems Dave Lewis is doing everything he can to improve the business — including restructuring team he has around him. Supermarkets succeed and fail on management decisions, so if Tesco’s new management can bring in the crowds at Christmas, and then find a way of keeping them (through unique product offerings at competitive prices), it may be able to set up a reasonably solid financial base for a time when consumers are more happy to part with their money.
If Tesco isn’t able to hold customers over the Christmas period, I suspect its share price will continue to slide. After a difficult year, I think this is one of the more important Christmas periods in the retailer’s history.