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Chart of the Day: will you walk by 'pedestrian' Tesco?

The country's biggest supermarket chain is spending £1 billion to turn round its UK business. But is that enough to impress investors?

 
Chart of the Day: will you walk by 'pedestrian' Tesco?

Life is tough for all supermarkets at the moment as hard-pressed shoppers weigh each purchase carefully.

But as our chart below shows, Tesco is finding the going toughest. While Morrisons (MRW.L) and J Sainsbury (SBRY.L) shares have trailed the FTSE 100, Tesco (TSCO.L) shares slumped after its shock profits warning in January and have never recovered.

Today Tesco confirmed a £1 billion plan to ‘refresh’ its dowdy stores, hire thousands of staff to improve customer service and deliver the price promotions shoppers want.

Some of the money will come from slashing capital spending on the foolhardy store opening programme Tesco has pursued in recent years.

Group trading profits rose a meagre 1.3% to £3.8 billion for the year to 25 February, although this was better than some expected and the shares rose 1.75%, or nearly 6p, to 334.2p. However, UK profits fell for the first time in living memory by 1% to £2.5 billion. By contrast international profits jumped 17.7% to £1.1 billion.

There was no sign of chief executive Philip Clarke heeding calls to pull out of the US and to scrap its banking expansion. The US Fresh & Easy chain reduced losses for the first time and is expected to break even in 2013-14. Meanwhile Tesco Bank has nearly completed its lengthy IT systems changes and the resumption of faster growth is promised.

Will this be enough to bring back investors to the stock? Leading fund managers such as Neil Woodford of Invesco Perpetual and Nigel Thomas of AXA Framlington have sold out, and the prospect of slow earnings growth while the UK business is sorted out is unlikely to bring them hurrying back.

How the big three have fared: Click to enlarge

However, investors like Warren Buffett and others who jumped on the shares after they crashed to grab a yield of 4.6% may be more forgiving. A final dividend of 14.76 pence per share brings a total dividend increase for the year of 2.1%, not much to get excited about although it is in line with underlying earnings. However, Tesco says the dividend is covered 2.5 times over by earnings from continuing operations so at leat the income stream looks reliable.

Analysts were aware of the risks.

Philip Dorgan of Panmure Gordon maintained his ‘buy’ stance with a price target of 440p. He felt the statement would reassure the market ‘that Tesco has a coherent plan for UK recovery’ though he stressed that ‘execution is key’.

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37 comments so far. Why not have your say?

CHRIS CARTER

Apr 18, 2012 at 12:23

A very arrogant company that felt it could ride rough shod over its customers and suppliers for very many years and it has paid the price-due justice indeed. I have no doubt that eventually it will put its house in order but at a heavy price. Maybe it will learn from its past mistakes and be a little bit more humble about its undoubted strength in the future. Somehow I doubt it. I feel the leopard is unlikely to change the colour of its spots in the longer term. My family for one will be slow to walk back through its supermarket doors!

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an elder one

Apr 18, 2012 at 14:39

A company that self evidently fitted a market once, whatever one may think otherwise, but times and customers' expectations change, and things wear out; it is clear that Tesco needs to reappraise itself now. Personally we never shopped there much (mainly Sainsbury), but I'll continue to hold their shares.

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an elder one

Apr 18, 2012 at 14:41

Sainsbury, but not to forget M&S!

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Jeremy Bosk

Apr 18, 2012 at 14:57

I went into a Tesco in the late 1970s, didn't like it, have not been back.

That the nearest Tesco is a 45 minute trip and Morrisons is a five minute walk may have something to do with it.

I haven't been into a Sainsbury this century and that is only 30 minutes away.

I once saw a Waitrose when visiting London. So, unlike most folk who live north of Watford, I know they are not just an urban legend.

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J Bewey

Apr 18, 2012 at 15:05

Same old journalistic ignorance and follow what their contemporaries wrote. What they issued was not a profit warning. Look and the figures and the company statement at the time, it did not constitute a profit warning as many enlightened economists have since stated. Still sesantionalism and hack journalism go hand in hand and the bears and the disgruntled have their own agendas for trashing the company. There are companies out there with foundations of sand being lauded over solid companies like Tesco, just as the hacks did in the dotcom boom and every previous bubble. Tesco will still be there when many of the 'darling' companies of today are history. Of course it would not be 'de rigour' to talk Tesco up in the Public School champagne and braces set so, whilst I agree Tesco has major issues to address, playing the long game is what counts 'old chap'.

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Philip Swift

Apr 18, 2012 at 16:30

It seems to be so easy to knock this company. Steady share price and dividend increases over the past 20 years. An increase in profits to £3.8bn. A store group trading an major geographies around the World and employs 290k people at all salary levels and all the city scribblers can do is knock them I don't get it, please explain.

We need more companies like this, lots of them. Their profits grew by a meagre 1.3%, but to £3.8bn!! that profits growth is far greater than most of our UK companies make in years - What's the problem?

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normski 2nd

Apr 18, 2012 at 16:31

What you must remember is that Tesco is the biggest employer outside of the public sector and people should be careful before trashing such acompany.

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alan franklin

Apr 18, 2012 at 16:31

We stopped using Tesco when they started backing Gay Pride campaigns in London. We won't be returning.

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Rob Walker

Apr 18, 2012 at 16:35

The "Collect-at-store" service is to be extended to other internet retailers (eg. Crocus.com for Garden Centre poducts). This was reported recently without much fuss but imagine if it became THE hub for collect-at-store sales? That could be very possible within 5 years. How would that affect turnover?....and all stock pre-paid ! One to watch.

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Dennis .

Apr 18, 2012 at 16:42

Most of these comments are emotive, the real issue for investors is that they are still a very profitable company with a sizeable proportion of total consumer spending. Warren Buffett receently upped his tatke to over 5%.

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Jn

Apr 18, 2012 at 17:10

The problem is that the market is affected by what brokers say. They are putting down a solid company.

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Nick-

Apr 18, 2012 at 17:33

It is a con by the City when in January they trashed the share price. They are supporting the brokers for you and I buying and selling. I will not be putting anymore money into the London stock market. Eventually they will only vaporize your assets.

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gggggg hjhjkl;'

Apr 18, 2012 at 17:37

Everyone quotes Warren Buffett, rightly, but he does not ALWAYS get it right!!!

He is no substitute for proper research.

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cc

Apr 18, 2012 at 17:46

I've had Tesco shares for years and, as Dennis states above, they are still successful. The worst thing about the stores is that the shopping experience varies so much from store to store - but you can hardly blame them for this as stores are cleverly tailored to suit to demand from the local area. I just wish they'd open a store nearer to Bath - many local authorities like ours are prejudiced against them, despite the wishes of the local community.

Why criticise a company which is so obviously satisfying strong consumer demand? No such criticisms are levelled at Waitrose or John Lewis, though their stores do not carry such a wide range of goods, nor sell at Tesco's excellent prices. I'm sure that Waitrose suits those with more cash and a higher standard of living, but they make up a much smaller proportion of the food buying population.

Jeremy - you may have found Tesco in the 1970's to be an unrewarding experience. You might be pleasantly surprised if you tried them again now. Some of the stores are very upmarket, attractive and above all well stocked - a feat which Sainsbury's have yet to achieve. The Kensington store (tailored to suit the local population) is a very pleasant place to shop.

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what me, worry?

Apr 18, 2012 at 18:10

Some reasons why tesco is "underperforming".

1.The shelves are often bare. Could someone get a grip on stock control. I visit tesco 3-4 time per week and basics are often out of stock. Im not talking fresh or ambient, Im talking long dated and tinned produce. Get this bit right and sales will be up 5-10% immediately. Trust me thats how much more I would be spending.

2. Have enough staff to carry out point 1. That will pay dividends immediately.

3. Managers have always been arrogant at Tesco (thats not a criticism its generally for the good of their store) and in the past they have always seen that sales come first. Recently they seem completely pre occupied with strutting and full of wind. Get a grip you are the best and you can do better.

4. Putting a block on overtime has been a false economy, turn a few lights off if you want to save money.

5. Double points was a WINNER. They lost ground the day they stopped it.

Tesco are still the best operator in the sector by a mile, they have just lost a sense in " doing the bleedin obvious". I just hope they can bring in someone who can give them that sense back.

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J Bewey

Apr 18, 2012 at 19:32

Jeremy - I first experienced Tesco in the 1970's when double greenshield stamps on a Tuesday in South London was order of the day. Price and choice well excellent for a hard up musician. Now I can afford the shares and my support. Pity the City brigade don't do something useful instead of manipulating the market con!

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Franco

Apr 18, 2012 at 20:39

Tesco have gradually been reducing spending in an effort to raise profits every year at all costs and now the chicken have come back home to roost.

The shelves are bare, goods out of stock take weeks to come back into stock, there are no staff in sight, the floors are dirty, the premises are shabby, queues at check out all the time. When you order from their website for home delivery, even Tesco corn flakes you see in the stores are not listed. Tesco may still be one of the cheapest, but shopping with them is not a pleasant experience. They lost the plot. I had rather shop at Sainsburys now, but parking there is more difficult.

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William Knapman

Apr 18, 2012 at 20:45

"Shares have never recovered" - since January

I can't believe the meaningless chart with pence per share for three supermarkets with completely different capitalisations and numbers of shares in issue.

Sorry to sound Victor Meldrew but what a really poor article

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albion8844

Apr 19, 2012 at 02:09

Tesco here in Thailand is a pretty uninspiring and unpleasant place to shop in too. I had issues with Tesco UK many years ago when I noticed that they were dumping food items onto Tesco Thailand close to their best before dates or even beyond the dates, that were on the shelves for sale to customers.

Tesco UK response was to deny any responsibility passing the buck onto the operations in this country.

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Michael Morfey

Apr 19, 2012 at 10:34

Three times (mid morning) I have visited the Big Tesco Extra store in Napier Road, Reading only to find less than one third of the checkouts were open. No amount of calls on the Tannoy system for managers and operators to attend the tills produced any results, so I emptied the trolley full of approximately £70.00 worth of goods onto a stationary conveyer belt with no checkout assistant and left. My only regret was leaving the trolley with the £1.00 coin still in. Still without my weekly groceries, I then went to Morrisons...what a difference.....checkouts fully operational. They seem to know how to run a grocery store efficiently by maintaining good customer service at checkouts.

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adg luiid

Apr 19, 2012 at 10:51

william it isnt a pointless chart it shows the relative price movement if you had bought tesco in feb or morrisons in feb it would have been better rebased at 100 but still shows the differential between the price movements if you look again you will see if you have a share at 100 it goes to 110 thats ten percent. if another share starts at 90 and gains 9 it has gone up 10 pct its hard for someone who can do maths to understand than re basing it at 100 but it shows the same thing.

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adg luiid

Apr 19, 2012 at 10:58

I thought the coversation on citywire would be smarter than yahoo ut it dont seem so the theory that tescos woes are all down to having no where to put her dog while she was shopping make as much sense as some of the theorys on here

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Anonymous 1 needed this 'off the record'

Apr 19, 2012 at 11:00

Mr Morfey, so rather than wait a few minutes for a free checkout you wasted your £1 plus the time it took (and extra fuel) to redo your shopping at another supermarket. What a dumbo!

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Dennis .

Apr 19, 2012 at 11:06

They used to say that the difference between shops in the old Soviet Union and the UK was that in USSR you queued to get in whilst in the UK you queue to get out.

Incidentally in most French supermarkets the checkout queues are generally longer, they don't seem to have adopted the "no more than one in front" strategy that people here have become used to.

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Jeremy Bosk

Apr 19, 2012 at 11:08

I think branches of the same store group vary as much as different stores. Morrisons is good enough (and close enough) that I make three or four visits if an item is out of stock rather than spend an extra hour going elsewhere. They are not perfect.

Last Saturday evening there were mile long queues as a lot of people had called in sick. The big football match and horse racing combined with large quantities of alcohol is my guess! Certainly most of the staff on duty were Muslim. Though they often are, reflecting the local population.

When I mentioned not visiting Tesco after one bad experience in the seventies, I was being jocular. The reason I have not been back is the journey time. It would take at least an hour and a half travelling to the nearest Tesco and back. Morrisons has one store within a five minute walk and another, across the road from Sainsbury, half an hour away. Shopping is a chore and the less time spent on it the better. I also use public transport. Frozen food does not travel well unrefridgerated.

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Jeremy Bosk

Apr 19, 2012 at 11:21

adg luiid

Apr 19, 2012 at 10:58

The problem of nowhere to leave your dog is a genuine concern for many people. They plan their lives around the issue. I have friends that run a pet friendly boarding house and do very well from it. My local Morrisons has the modern equivalent of a Wild West hitching post for dogs that is very well patronised.

It may seem trivial to you and obviously does to a Tesco manager. But that is just symptomatic of an attitude. Add up all the trivial issues and you soon have a major problem. It is a bit like the policing theory of zero tolerance. Allow one person to drop litter, a second to post graffiti, a third to smash a window and pretty soon you are living in Kabul.

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Harry Brooks (Citywire)

Apr 19, 2012 at 11:27

William K and adg luiid: point taken on the chart. In future we'll rebase share price comparisons to 100 for clarity. Thanks.

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Dennis .

Apr 19, 2012 at 11:52

The dog problem is important, I don't have a dog but it's clear that "minor" (to some people) issues like this can make all the difference between getting someone's business or not. I remember my wife some years ago frequenting one supermarket because we had twins and they had trolleys with twin seats. The alternative was trying to control two kids in two separate trolleys.

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Punter in the Park

Apr 19, 2012 at 14:26

Someone close to the Tesco Board told me Phillip Clarke is a first-class Number 2 but a second-class Number 1. As a long-standing shareholder and fervent supporter of the company I hope that judgement proves wrong.

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Dennis .

Apr 19, 2012 at 14:46

I wonder if Terry Leahy saw this coming and got out with his reputation intact? A similar thing happened in BT when Ben Verwaayen handed over to the current CEO just before the Global Services problems emerged.

I was once told that taking a sales job is always difficult, if the territory is fertile then the incumbent wants to stay otherwise there are probably hidden nasties.

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Michael Morfey

Apr 19, 2012 at 16:31

Anonymous 1

What I didn't tell you was, that the third of the tills which were in use had a queue of shoppers with trolleys where 4 to 6 people were waiting at each till.

As I left empty handed, the self service checkouts were also congested with basket and trolley shoppers all in the area together.

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Punter in the Park

Apr 19, 2012 at 16:55

Anon 1 and others: If your only contribution to a business article is to moan about what happened when you went shopping why don't you buy a copy of "Woman's Own" and meet in The El Morocco Tea Rooms for a good old natter.

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Jeremy Bosk

Apr 20, 2012 at 00:17

Punter

Retail is about having the right goods, at the right price, in the right location and SERVICE. Which is otherwise known as reputation. Goods placed behind a barrier of bad service are in the wrong location because they are simply not available. Think about it.

Many investors buy what they see around them, Everybody is buying Brand X? Then buy shares in X, sell Y and Z. The chavs are all wearing Burberry? Sell Burberry (actually, the Chinese are the major buyers so lack of brand appeal in the UK does not matter to lovers of the check clothing company). Anybody walking down the high street a few years ago would have looked around and sold Woolworths. Eyes and ears are as useful as data tables.

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cc

Apr 20, 2012 at 12:20

I agree Jeremy - I bought Sainsbury's shares when they were first issued, because I liked the stores. Then I switched to Tesco. I actually got it right - wish I'd bought Safeway/Morrisons when I saw them improve.

It makes sense - if they are satisfying consumers they will do well, if not they won't. I think that the problem with Sainsbury's now is that they are not consistent - stock is very variable and so is service. Others commenting above have disagreed, but I have always found Tesco to be better in both respects. I have a relative who worked for Tesco briefly before he went on to university - they took the trouble to train him very thoroughly, even though they knew he was temporary.

Although they have gone off-track over the past couple of years they still hold a lot of valuable real estate in the right places. Hopefully this new injection of cash will take them back to their previous high level of customer satisfaction.

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terence radley

Apr 22, 2012 at 12:52

Chris Carter has got it right ! Tescos have treated their customers /suppliers very badly in the past,like Chris said "Leopards don't change spots"They are re-vamping some stores,so they still have missed the point,its not window dressing they need its dignity to their suppliers,fair treatment,not bankrupting them by moving the goal posts after the contract has been signed.

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paul armstrong

Apr 22, 2012 at 13:21

Well I cannot see why people think leaving a trolley of shopping and walking out is such a surprise. When faced with bad service, what else would you do ? Just because I have spend 20 minutes shopping doesn't make me a prisoner. Tesco's problems in the UK seem to mirror what Sainsbury's went through 15 years or so ago. A lick of paint, more staff and better local stock control should do it. A bit puzzled by their Direct' service though, when ever I have looked at it they are either out of stock or too expensive. Their clothes are pretty shoddy too.

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Dennis .

Apr 22, 2012 at 15:04

I have notice that some of their checkout staff have become rather unprofessional recently, eg complaining about not having a break etc. This may be true but you don't complain to the customers about your employer.

As for things like wine I have discovered that the offers in my local SPAR shop are often better value so I never buy wine in Tesco now and my wife prefers to buy bread elsewhere too.

Tesco cafes are also poor, they seem to have been franchised out to people who don't seem to care too much and in one I visit the coffee machine is always broken and a jar of instant is there for you to do it yourself.

However, all of these things are fixable so I see this as a good time to invest.

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