Monday, 11 June 2012

Tesco Q3 update: "Building a Better Tesco!"

FTSE100 @ 5490.84, +55.76 (+1.03%)
Tesco @ 300.90p, -1.90p (-0.63%)

Tesco down today against a bounce in the market following a positive reception of the "proposed" bailout of Spanish banks.

The trigger is clearly the Quarterly Interim Managament Statement (FIRST QUARTER INTERIM MANAGEMENT STATEMENT) which, unfortunately showed a fall in UK like for like sales of -1.5% (-1.6%). A 3rd consecutive quarterly fall in UK lfl sales which excludes fuel and VAT.

Could -1.5% be a sign of that the fall in sales is slowing given that it is less than the previous quarter's -1.6%?

It also looks like last year's comparative included the benefit of the Royal Wedding but this year's excludes the Diamond Jubilee which is very much in this year's favour then ie. very strong comparatives to compete with due to an exceptional event in last years numbers.

As such the statement points to the week prior to the Diamond Jubilee (post this quarter) as being the best ever outside of a run-up to Christmas with over £1bn of sales.

Asian sales were up 0.4% (-0.4%) despite the inertia of slowing Chinese sales.
European sales were up 0.4% (0.3%).
US sales were up 3.6% (12.3%).

N.B In 2011, European sales at £9.313 bn accounted for 14.4% of the Group's sales of £60.455 bn.

So, on the face of it, still no respite in the company's falling UK sales.

But, to be clear this is growth being discussed not market share so it remains to be seen how much market share has suffered once the sector's sales as a whole are analysed, and the pie apportioned.

Although, I have just read that Sainsbury's quarterly statement will include the Diamond Jubilee which will add some noise to any analysis!

Its still too early to tell and, as ever there are 2 sides to the debate as to whether the company, under CEO, Philip Clarke has responded in time to arrest falling sales through its re-investment of profits in, and re-envigoration of, UK stores.
The company has also closed off a number of ventures that have proven to be both a distraction and a cash drain on the company's cashflow.
All in all, this is a much needed reversal of the company's previous strategy under the previous CEO, Sir Terry Leahy, where seemingly unassailable growth in UK profits and cash-flow was channelled into additional ventures, overseas and non-grocery.

Looking ahead the company believes that it is trading in line with expectations and has maintained its full year guidance.
I would suggest that the next quarter could be very interesting for the sector as a whole given that it is likely to include the Diamond Jubilee (already discussed), the European Championships, and the start of the Olympics.
Although this might actually cloud how the true underlying picture is progressing.

It still looks like an obvious move for me to top up my existing holding in what "should" still be a profitable long term business with a track record of dividend growth.
I've already said that its still early days with regards to the strategy and I notice that today's fall is against the backdrop of a bounce in the FTSE.
But the share price is also ploughing 52 week lows and stands on a forecast p/e of 8.7 times and a yield of 5% which is starting to look attractive.

My preference would be for the share price to find a supported level of its own that then floats with the FTSE for a time whilst the strategy bears fruit.

Its on my shopping list then.

Article links:
- Chart of the Day: will you walk by 'pedestrian' Tesco?
- Tesco’s performance in UK forecast to slip again

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