The troubles of Tesco (LSE: TSCO) and the other big four grocers over the past few years have shattered the long-held belief that investors could count on the sector for reliable (if boring) growth, steady dividends and little chance for the ground to collapse beneath shareholder’s feet. But now that we’re two years into the reign of CEO Dave Lewis, how is Tesco’s turnaround coming?
There are signs emerging that several years of tough medicine are bearing fruit. Full-year results released in April finally showed positive movement in UK operating margins, albeit from a miserly 1.1% to 1.2% year-on-year. Combined with June’s announcement that UK stores saw like-for like sales up 0.3% in Q1 and Tesco bulls were out in force.
The bad news is that while Tesco is doing well to right the ship, the outlook for the sector at large remains bleak. Kantar Worldpanel’s latest figures on the state of the industry saw low-price rivals Aldi and Lidl increase year-on-year sales through the past 12 weeks by an impressive 10.4% and 12.2% respectively. Tesco, meanwhile, saw total sales drop 0.4%.
The rise of these relative newcomers shows little signs of slowing, much less reversing, as Britons increasingly believe that their cheaper goods are of the same quality as Tesco’s. This means that the big four will continue their vicious fight over an ever-shrinking share of the market, keeping margins and profits low.
We’ve already seen this with Tesco, where operating margins are a fraction of the 5%-plus regularly posted only a few years ago. Tesco’s turnaround may be going well, but the headwinds buffeting the entire grocery industry lead me to believe profits, dividends and share prices have a much lower ceiling than they used to.
New normal?
If a turnaround has taken nearly eight years, is it still a turnaround or should it be considered the ‘new normal’? That’s the question shareholders of Barclays (LSE: BARC) must now confront eight years on from the Financial Crisis as dividends continue to fall alongside profits and margins.
Interim results announced last month saw year-on-year pre-tax profits fall 21% as losses in the bank’s non-core assets leapt to £1.9bn and dragged return on tangible equity (RoE) down from an already low 6.9% to a downright miserable 4.8%.
While the bank is making progressing in selling off non-core assets, it remains saddled with some $46.7bn in risk-weighted assets yet to move off the books.
However, the bigger problem facing Barclays is the competing visions for its future. Recently-fired CEO Antony Jenkins plotted a focus on transatlantic retail banking, a sensible strategy given the very impressive margins these divisions offered. But with his ouster and the hiring of Jes Staley, the bank has doubled down on maintaining its position as a leading bulge bracket investment bank.
The issue is that a bevy of new regulations have kept trading profits low, caused costs to rise and increased required capital buffers. All of this led to RoE at the investment bank to fall to 8.4% over the past six months, a far cry from the 13.6% from Barclays UK or 24.9% from the credit card arm.
The regulatory and market conditions keeping the massive investment bank’s returns low aren’t going anywhere. As long as this division continues to counteract the impressive returns from the retail bank and credit card divisions, I don’t see the turnaround bearing fruit anytime soon.