Investors who have stood by Tesco (LSE: TSCO) must be despairing right now. It is just one blow after another. The stock is down 53% over five years and 25% over the last 12 months. The last thing investors needed was to get caught up in the latest market sell-off. If China ends up exporting yet more deflation to the West, maintaining grocery sector profit margins could be even harder.
Loyal followers have clung onto Tesco regardless, putting their faith in new boss Dave Lewis engineering a drastic turnaround. I think the best they can hope for that it will retrench into a smaller, leaner operation, by cutting costs, closing stores and shelving expansion plans. Few can reasonably expect it to recover its former dominance.
What In The World
Tesco nonetheless remains the dominant grocer with a 28.3% market share, according to latest figures from Kantar Worldpanel. That marks a 10-year low, however, down from 28.8% 16 weeks ago. Over the same period, Aldi increased sales by 18% and Lidl 12.8%. That is a brutal growth grab, carved out of the broken hearts of big boys such as Tesco, J Sainsbury and WM Morrison Supermarkets (LSE: MRW). The only way they can fight back is to slash their prices, even harder than in the recent price war, but they remain reluctant to sacrifice their margins to do so. And even if they were, they still couldn’t slash prices low enough without slashing service as well, and their customers won’t thank them for that either.
Nothing seems to go right for Tesco. Just a few short days ago, it was anticipating a three-way private $6b equity bidding war for its South Korean unit Homeplus. But the bids didn’t emerge as anticipated, Asian markets crashed along with the Korean currency, and now Homeplus could be dumped at a reduced price.
Despite these troubles, Tesco still isn’t cheap, trading at 22.7 times earnings. Buying it now can only be an act of faith, or madness. With the discounters rampant, and drastic Dave’s honeymoon period nearing its end, there could be yet more trouble in store.
Morrisons Misery
Investors in Morrisons have been able to console themselves with a whopping yield, now a beyond stonking 8.15%, but not for much longer. The 2015/16 dividend is set to be cut by as much as 65%, hacking next year’s forecast yield back to just 3.7%.
Morrisons’ recent sales fell at an even faster pace than Tesco’s, down 1.1% in 16 weeks, according to Kantar. Market share is now heading towards single figures at 10.8%, down from 11%. The spring share price recovery has petered out, and the recent decision to back its M Local convenience store outlets is the sign of a company firmly on the back foot.
Growth in its belatedly-launched online operation offers some consolation, and management is working hard to cut costs, pay down debts and invest the savings into price cuts on 1,700 items. This will be a smaller operation in future, and we can only hope that it will be sleeker as well.
Earnings per share are forecast to drop another 9% next year, before rebounding sharply to 20% in 2017, suggesting all is not yet lost. By the end of that year, the yield is forecast to be just 3.4%. Morrison won’t be much much of an income stock by then, and it would take a rosy-eyed optimists see it as a growth play either.