Tesco results provoke sharp reaction from analysts

Commentators used stark language to describe the troubled retailer’s plight after the results were published yesterday (October 23). Memorable phrases included “rudderless ship”,​ “dagger through the heart”,​ and “rocked to the core”.​

‘Rocked to the core’​

Here, we capture analysts’ reactions at a glance in key quotes.

The value of Tesco shares fell by more than 6% yesterday, as investors responded to the news​.

We end this article with a video interview with new Tesco ceo Dave Lewis, who explained why he believed there is light at the end of the tunnel for the retailer.

Begbies Traynor​, retail expert Julie Palmer:

• “While the huge decline in profits for Tesco will come as no surprise to the markets given their recent woes, it does demonstrate the extent to which the supermarket giant has fallen from grace in recent years.”​
• “It isn’t all gloom and doom for the retail behemoth though, as recent sales performance has improved which may be cause for optimism. However, what shareholders will want to know is why the supermarket chain has been so slow to respond to the seismic changes in consumer buying behaviour, when rivals like Asda and Morrisons already made swift changes, and whether it has the management bandwidth to continue that improvement as we move into the important pre-Christmas trading period. Ceo Dave Lewis will now be concentrating on a strategy that can compete with Aldi and Lidl’s unwavering success whilst also addressing the shift in consumer demand from supermarket to convenience shopping. The question is: will it be too little, too late for what was once Britain’s favourite supermarket?”​

Birmingham City University​, business and retail expert Professor Chris Edger

• “Essentially, over the past six years, as Tesco has milked its UK business to fund foreign adventures it has – as the ceo has remarked – lost the trust of customers. Back in the day, customers felt that they were – on balance – getting great value from Tesco on their food purchases. However, the hi-lo strategy it has pursued over recent times, bouncing products in price to both ends of the spectrum, has led to confusion amongst customers.” ​
• “​In terms of direct competition, Asda (more latterly) Morrisons and the hard discounters shout EDLP (every day low price) in a transparent manner. They are not opaque, in the sense, they hike-crash-hike again or use loyalty points systems as a confusing tactic to give customers the perception of value. No, they are fighting on straight transparent pricing platforms. And that is where Tesco needs to regain the trust of its customers.”     ​

The Conlumino Team​, md Neil Saunders:

• “There is no surprise that Tesco’s results are disappointing: the outcome of this half was never going to be anything other than negative. However, the on-going scale of the decline – which accelerated in the second quarter of the trading period – does give cause for alarm. It also underlines how much the business needs to do in order to get back into growth.”​
• “This task of rejuvenating the company has been made all the more difficult in light of the accounting irregularities, which have been investigated by Deloitte. The outcome of this is that Tesco overstated profit by £263M, slightly more than the £250M first anticipated. While the Deloitte investigation is now concluded, Tesco cannot draw a line under this incident until the official investigation by the FSA ​[Financial Services Authority] is complete. We believe that this is serious, albeit entirely necessary, distraction for a business that needs to be completely focused on its trading activity.”​
• “Above all Tesco needs to regain a sense of purpose and to understand what role it is playing in the lives of British consumers. This understanding is what allowed Tesco to become so big and it is, ultimately, what will stem the decline.”​

Finspreads​, financial consultants Warren Ruhomon:

• “The lack of transparency on the level of profits that Tesco expects to report for full-year performance is another dagger through the heart of investor sentiment. It’s hard to see any investors out there buying Tesco shares on anything other than hope it can turn itself around right now. The lack of guidance, a deeper than expected accounting hole and a grocery sector that is in structural decline are three of the biggest issues affecting Tesco right now.”​

Moore Stephens​, consultancy, head of Food Advisory Group, Duncan Swift:

• “What shareholders and customers of the top 10 supermarkets do not realise is the extent of the buyer bonus culture that underpins demands for suppliers to pay commercial income. This bonus culture is comparable to the bank bonus culture, with supermarket buyers, operating in trading rooms similar to those operated by the banks and investment companies.”​
• “The main part of a supermarket buyer’s annual bonus is based on the total amount of supplier-paid commercial income they have extracted from the suppliers in the food category (e.g. eggs, cheese, fresh produce, beers, wines and spirits etc) for which they have responsibility. Tesco’s overstatements of profit means its buyer bonuses will have been similarly overstated and already paid over a number of years.”​
• “As with the banks, someone must ultimately pay for these bonuses and although on the face of it the supplier seems to be footing the bill, we must ask how much of this cost the consumer pays for at the checkout. It is also important to consider the impact on the supplier’s business in as much as what pressure that business is under to be able to afford to pay these supplier contributions. Also, the impact this has on the treatment of supplier staff and the quality of our food that we are paying for at the checkout.”​

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The Economist Intelligence Unit​, retail analyst Jon Copestake:

• “The bad news doesn't seem to have an end at present. The current decline comes as Tesco concludes an internal investigation into a £263M profit overstatement. Tesco’s like-for-like sales fall also comes as the firm sits bottom of a customer satisfaction survey, despite an £800M investment in better stores and services by Philip Clarke, ​[Lewis's predecessor]. To top things off, Lewis will have to face the future without the chairman, Sir Richard Broadbent, who is stepping down in light of the accounting scandal.”​
• “If there is a silver lining for Tesco, it is that Lewis will no doubt now have carte blanche in engineering a turnaround. As an outsider he comes in unencumbered by the firm’s previous mindset and has a clean slate to work from with the blame for the current malaise firmly directed at Lewis’s predecessors.” ​
• “It is also worth remembering that, despite everything, Tesco still managed to turn a quarterly profit and it remains the largest retailer in the UK as well as one of the four or five largest globally. There is a precedent here, with Georges Plassat at Carrefour delivering a quick turnaround by exiting a host of foreign markets to refocus on its domestic share. Rumours are already circulating of an Asia spin off for Tesco to release funds for UK investment. This will no doubt deliver short term gains, but may be a decision that comes back to haunt Tesco (and Carrefour) in five or 10 years’ time as Asian market growth continues to outpace that of Europe.”​

Planet Retail​, retail analyst David Gray:

• “This morning’s results show how retail giant Tesco has been rocked to the core by the accounting scandal – with a string of key executives now on the suspended list and every painful twist and turn gleefully documented by both specialist and mainstream media. Not that they want for material, either. Like-for-like declines in almost all markets – including the UK – are now the norm for a company that seems bereft of any solution that might arrest its vertiginous decline.” ​
• “But Tesco, although down right now, is not quite out cold yet. It remains the UKs most profitable grocer – for the time being at least. Not to mention one of the world’s biggest convenience store players. Whatever the chaos raging around Chesham HQ, Tesco continues to demonstrate adaptability in this channel – rolling out mini c-store formats across Korea and Thailand. Longer term, these will provide a growing revenue stream – providing a buffer against declines elsewhere. We expect Tesco’s global convenience store sales to rise to almost £11bn by 2018, from £6.9bn currently.”​

Shore Capital, ​analysts Clive Black and Darren Shirley:

• “Tesco has had quite a few years of challenge and disappointment. However, we can never recall a period so damaging to the reputation of the company as the first half of  financial year 2015. That a powerhouse of international retailing was reduced to a rudderless corporate entity where downgrade followed downgrade, executive followed executive out of the business, with no effective succession planning, capped by a material accounting issue, reflects to a detrimental extent, to our minds, upon those who are the guardians of Tesco on behalf of its owners.” ​
• “Shore Capital has a ‘hold’ stance on Tesco stock. Tesco remains a business in transition, it has been so for years now but the corporate physicians in recent times were applying inappropriate medicine to pre-existing conditions, weakening ‘the patient’ further still. Even in better hands it remains the fact that a business of this scale needs time to be positioned to compete to customer benefit on an ongoing basis. We highlight customer benefit because without their patronage shareholders will not ultimately see a reward from rising earnings and sustainable dividends; noting that the interim financial year 2015 pay-out has been cut by 75%. Management is pointing to further headwinds and the need to prioritise the customer, leading us to retain our expectation of a c75% full year dividend cut too.”​

 And now, over to Lewis – in his own words, delivered in a video interview produced by Tesco.