Can Tesco's new chief turn things around: We ask eight readers
A 10-year low
Shares in Tesco hit a new low as Standard & Poor’s cut its rating on the stock following last month's profit warning.
The move means it is a real baptism of fire for Unilever veteran David Lewis, who is replacing Philip Clarke as chief executive.
S&P cut its rating on the stock by one notch. ‘The downgrade reflects our view that Tesco's profitability will continue to weaken because market competition in the UK will remain persistently high, and even intensify, over the next 12 months,’ it said in its research note.
‘Tesco's market and financial positions have not tangibly improved, despite extensive restructuring and substantial spending on a long-term program to improve its stores and customer service.’
Amanda Forsyth, Investment Manager, Murray Asset Management, Edinburgh
‘Tesco has become a “big picture” investment, and the picture in this case is of an overcrowded UK food retail market, with Tesco still occupying a dominant but shrinking, position.
‘Growth in convenience stores shows the UK consumer has come full circle, from local grocer to megastore and back again. For Tesco as the largest UK player this represents the biggest headache. If the only route to recovery for Tesco is to shrink, it could even be argued that an equity market listing is inappropriate.
‘Whether Dave Lewis has the right skills to deliver growth in an increasingly local and price-conscious market remains to be seen. He comes recommended as a turnaround expert, which could mean he has the inspiration Tesco needs. If he can do all this while maintaining the motivation of more than 300,000 staff, he will be worth every penny of his £1.8 million package.’
Carla Langley, UK Equity Research Analyst, Brown Shipley, Manchester
‘Tesco has a solid portfolio of stores and a strong online offering but with lacklustre marketing, the brand is dying a slow death. Luckily for Tesco, Dave Lewis is a ‘brand man’. In a struggling market the food retailer needs bold, forward-thinking management and innovative ideas.
‘As the first outsider to take charge of the brand since 1919, Dave Lewis has the benefit of a fresh pair of eyes. His success with brands such as Dove and Vaseline means he is likely to be ruthless with the Tesco brand.
‘But does his lack of retail experience matter? I think not. With a strong team of retail experts, Tesco has got a great chance of bouncing back to its former glory.’
Geordie Kidston, Senior Research Officer, JM Finn & Co, London
Tesco faces an era of real change after the replacement of Philip Clarke in favour of the first outsider in 95 years - Dave Lewis, a former senior executive at Unilever. Clarke had been slow to cut down on ambitious expansion left as a legacy from the Leahy era, especially the US chain Fresh & Easy. It dragged on for two years, sapping energy and money from the Group leaving Mr Lewis having to address a “reset” of Tesco’s margins in the UK, faced with strong competition from German discounters. He needs to end the space race in the UK while slowing down polarisation and re-jig the Tesco portfolio which has not covered its cost of capital in 20 years. The dividend has been the last support for the share price but may now be at risk.
Unless Tesco continues to cut capex, maintain a high level of sale and lease backs or seek for a significant portfolio optimisation, net debt may deteriorate further and the funding of the dividend could be in question. I think the jury is out until Dave Lewis has had time to appraise fully the status of the Group and announce his reorganisation however he was well respected at Unilever and knows Tesco well, having been a major supplier.
Jonathan Jackson, Head of Equities, Killik & Co, London
'We believe the appointment of Dave Lewis at CEO of Tesco is positive in a number of respects. Firstly, Lewis has worked in a variety of roles with Unilever over the last 28 years and comes with an excellent reputation and, as an outsider, he will bring a fresh insight to the business. Secondly, he brings a wealth of international consumer experience, and expertise in brand management and customer development. This is essential as Tesco continues to struggle to reinvigorate its brand in a competitive market. Finally, the current CEO has lost the confidence of many in the market, and a change is likely to be seen as the best move for the company.
'Offsetting this, however, Tesco has also announced that current trading conditions are more challenging than it anticipated at the time of its first-quarter update on 4 June. The overall market is weaker and, combined with the increasing investments being made to improve the customer offer, this means that sales and trading profit in the first half of the year are somewhat below expectations. The outlook for the full year will be influenced by: the extent to which benefits from the investments being made begin to be seen; by conditions in the overall market; and by any steps that may be taken during the remainder of the year to improve the customer offer further. The statement does not provide detail on the extent of the downgrades, although in conversation the company appear to be guiding toward mid-20s EPS for the year to February 2015 (vs. previous consensus on 27p). However, we sense the market has already pencilled in lower numbers in light of recent industry data.
'Overall, although the update on trading is negative, and it will be some time before the new CEO gets to grips with the company, we view his appointment as a positive.'
Luke Tribe, Research Analyst, WH Ireland, Manchester
‘The new management can improve the business but there are operational difficulties to overcome and the current trading environment is compounding poor performance. Consumer sentiment is weak as incomes are squeezed.
‘Tesco’s current strategy is not working and customers have favoured the discounters, eroding its market share. Negative news flow over the past few years is reflected in the company’s valuation. There have been some good changes, too, such as divestment in international markets like Japan, US and China.
‘The business needs evidence that performance is improving, and reducing international losses may kickstart recovery. Underperformance of its superstore format is also a concern and this needs addressing to realign with shopper habits. As market leader, Tesco needs to return to innovation, focusing on technology, convenience and internet sales. If the economics improve, the brand should return to growth, but it could be a slow road to recovery.’
Paul Wharton, Investment Manager, Tacit Investment Management, London
‘It is hard to see a bull case for Tesco. Revenue has flatlined and discount competition is eroding the customer base and putting downward pressure on margins.
‘Earnings per share growth has been falling even as the UK economy has been recovering. The US expedition cost shareholders dearly and lost Tesco’s management credibility. Strangely, the new management team has limited retailing experience.
‘If expansion abroad is not a real possibility then domestic market development may be an option, but clothing, banking, telecoms and insurance are already super-abundant in the UK and highly competitive. Meanwhile, the internet is taking an expanding share of consumer spending and rendering many of Tesco’s hypermarkets redundant.
‘The dividend yield of 5% offers some support but with flat or falling revenues and the inevitable costs of extensive restructuring absorbing free cashflow, there is little prospect of dividend growth. Investors have better places to put their money.’
Rohini Rathour, Partner and Head of UK Thematic Equities, Sarasin & Partners, London
‘Despite negativity around the recent results and change of CEO, Tesco is still the UK’s market leader and one of the biggest players in its global markets, which is a prerequisite for sustained performance. It is a multi-channel retailer and one of the more successful challenger banks that has expanded into other areas profitably. However, Tesco must reflect the fact people’s shopping habits have changed by refreshing its store base and competing more effectively with the discounters.
‘To date, just over a third of its superstores and 18% of the overall store base has been refreshed. In the long term, these refreshed stores should generate higher footfall and sales, and the space will be more profitably deployed, improving margins and return on capital employed.’
Disclaimer: Sarasin & Partners is a holder of Tesco shares in its clients’ portfolios and recently added to its holding.
Rosie Bullard, Portfolio Manager, James Hambro & Partners, London
Have you shopped at Tesco recently? Personally, I have found the quality of the experience disappointing with poor customer service and grubby stores. Its sell by date seems to have passed since its heyday in the early 2000s now that it has become more socially acceptable for British middle classes to buy their basics at Aldi and Lidl whilst topping up their baskets at Waitrose. How can Tesco get those 4x4s back into its carparks?
The lemon appears to have been squeezed dry under previous management and with questions over falling sales, excess capacity and seemingly permanent margin pressure, the new team have a serious challenge. The shares (and the products) look cheap for a reason.