Tesco management faces a multi-year job, says ‘nervous’ City

Shore Capital analysts Clive Black and Darren Shirley said: “We remain concerned about the robustness of our financial forecasts and consensus estimates for 2014/15, given what appears to be weak trading at the start of the New Year.”  ​

Black and Shirley added that the immediate future of Tesco reflected the robustness or otherwise of the UK core business. “The size of the task facing management is considerable and it remains a multi-year job,” ​they said. “However, two years into making Tesco better, the sales momentum in the UK appears to be challenging. Additionally, the competitive environment now seems evermore challenging, enhancing our nervousness.”​

Long way from delivering on its own ambition​

Tesco was a long way from delivering on its own ambition to focus on free cash generation and returns, said Black and Shirley.

Recent Nielsen data revealed very wet weather and consumer cost cutting had contributed to falling sales at UK supermarkets for the 12 weeks to February 1. Aggregate sales value growth during the four weeks ending February 1 fell marginally by 0.4%, while year-on-year unit sales fell by 3.2%.

“In the four week period, we calculate that Morrisons’ and Tesco UK’s like-for-like sales may have been particularly weak; maybe – 7% for Morrison and perhaps as weak as minus 5% for Tesco​ with same-store volumes lower still,” ​said Black and Shirley.

Outside the UK, Tesco’s European business remains challenging, with share losses continuing in Ireland. Shore Capital noted press reports that Tesco might engage in a joint venture for its Kipa business in Turkey, which it regarded as encouraging.

‘Effectively abandoned 5.2% as a target margin’​

The analysts believed Tesco had “effectively abandoned 5.2% as a target margin for the core chain” ​in September 2013. “Margins may be higher or lower but the core business is not expected to be managed with 5.2% as its prime mantra to our minds,”​ said Black and Shirley. “Tesco needs to deliver profitable sales growth at the end of the day.” ​

Tesco management is to hold an investor day in London tomorrow (February 25) to update the market on plans for its UK business. Shore Capital expected the briefing to cover non-food strategy, digital and multi-channel direction, hypermarket conversion and superstore upgrades.

The analyst repeated its ‘hold’ advice on Tesco stock.

Meanwhile, last week Tesco launched its Trading Responsibly​ plan, which it claimed would benefit both suppliers and customers.