Once upon a time there was a Christmas that changed our lives. The year was 2011, and Tesco (LSE: TSCO) had a stinker.
It signaled the end of our love affair with our top FTSE 100 supermarkets, made us painfully aware of the competition that had been creeping up from Lidl and Aldi, and sparked the decline of shares in our top three listed food retailers.
Tesco shares are down 56% since that fateful day, to 188p, and investors have faced each subsequent Christmas trading update with trepidation. Now the time is upon us again, as Tesco is due to reveal its festive season trading performance on Thursday 8 January.
Best Christmas?
Initial indications suggest we’ve had the best retail Christmas for some time, with some pundits predicting a 7% rise in spending over last year, which could help send annual retail sales to a record of more than £340bn.
But in a lot of ways, that’s not great news for the supermarkets as it has been driven by some very hard price wars and margins being slashed. In fact, around three quarters of our big high-street chains have started their sales before Christmas this year, as the annual game of chicken swings more and more in favour of shoppers.
After Tesco’s most recent profit warning on 9 December gave the share price a shock, this year’s update could be the most keenly awaited since the crunch. That warning told us to expect group trading profit to “not exceed £1.4bn“. Tesco told us that its restructuring activities will hurt profit in the short term, and that it will “share more detail about the measures we plan to take to improve the competitiveness of the UK customer offer and to strengthen the balance sheet” on 8 January — and to me, that suggests further hardship to come.
In the wake of that news, earnings per share (EPS) forecasts for the year to February 2015 were cut back further, with a consensus today of 11.7p per share down from 16.1p a month ago — we’re now looking at a fall of nearly two thirds in forecast EPS over the past 12 months.
Shares still not cheap
But even with the price down at today’s levels, Tesco shares are still trading on a P/E of around 16, so a lot of investors are clearly expecting a significant recovery in profits even though there’s only a 2% rise in EPS currently penciled in for February 2016.
It doesn’t surprise me that a majority of brokers have Tesco down as a Hold right now, so we’ll have to wait and see — at least until next Thursday.