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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?
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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