Today I am explaining why I believe savvy investors will continue to give beleaguered supermarket giant Tesco (LSE: TSCO) short shrift.
Lewis fails to assuage concerns
Although Tesco’s new chief executive Dave Lewis has now been in the job for 103 days, he is still to spell out a clear strategy to turn around the ailing supermarket’s fortunes, much to the chagrin of the City and private investors alike.
The new man was berated again this week for failing to reveal a clear strategy as he spelled out yet another profit warning at the firm, the fifth such downgrade in this year alone. Lewis was criticised for failing to provide details at the time of Tesco’s half year report back in October, Lewis apparently holding back details for fear of giving an edge to the competition.
But with the share price continuing to haemorrhage — the stock has dived 47% since the turn of the year and recently touched 14-year lows around 168.75p per share — Lewis and his team need to recognise the extraordinary patience of long-standing investors and share its plans with the market.
2 + 2 = 5?
Of course the rot set in at Tesco long before Lewis took over, however. From the reputational damage of the horsemeat scandal early last year, through to the firm’s humiliating withdrawal from the US by dumping its Fresh & Easy outlets, the supermarket can be accused of behaving with terrific arrogance and taking its established UK customer base and supplier network for granted.
And as the suspension of seven senior executives since its £263m profit overstatement for the first six months of fiscal 2015 came to light — a development that has prompted an investigation by the Serious Fraud Office — the problems run far beyond Lewis, and investors will continue asking questions over the standards of accountancy at the firm.
Indeed, Tesco stated this week that trading profit for the current year will not exceed £1.4bn this year. This is around £1bn short of the figure it put out barely four months ago with its guidance of £2.4bn-£2.5bn.
Shareholders are already taking action against these shoddy accounting practices, and legal firm Stewarts Law is rounding up hundreds of British private and institutional investors seeking compensation for the foggy first-half profit projections. Many investors in the US are also seeking redress.
No way back?
Tesco seems to have finally woken up to the structural problems facing the country’s major established chains, but the game has changed since then and the business may be powerless to stem the tide.
The 2008/2009 global recession pushed shoppers into the hands of discounters like Aldi and Lidl and showed the British public that they can fill their trolleys for much less. Meanwhile the rising popularity of premium outlets like Waitrose is also leaving Tesco scrabbling around for crumbs in an increasingly-shrinking middle tier.
Indeed, City analysts see no end to Tesco’s woes any time soon, with last year’s 5% earnings dip expected to worsen in the year concluding February 2015 with a 49% drop. An expected 6% fall in fiscal 2016 represents something of a recovery, but I believe the days of Tesco enjoying robust earnings growth have been consigned to history.
With the new kids on the block ploughing billions into ramping up their UK operations, and Tesco’s presence in online and convenience becoming ever-more congested, any signs of a turnaround at the beleaguered chain looks set to remain elusive.