By John Harrington
Date: Tuesday 17 Apr 2012
Results from slumbering supermarket giant Tesco are due out on Wednesday and no matter how much the company bangs on about it being a global retailer - the third largest in the world by revenues - it is the performance of the UK stores that will be under a harsh spotlight.
Asia and the operations in Eastern and Central Europe are expected to show decent growth but we know that performance in the UK will be disappointing, because Tesco has already told us so.
The company has already given guidance on what the full year figures are likely to be in an update interpreted in all quarters as the company’s first profits warning in living memory, but for the record, the market is expecting profit before tax of £3.6bn on sales of £65.8bn.
Earnings per share are tipped to be 33.6p while the dividend – which is becoming a key appeal of the share price – is seen rising to 15.06p for the whole year from 14.46p the year before. However, Panmure Gordon thinks the group might freeze the final dividend, which would mean a full year pay-out of 14.72p.
“Following a Christmas LFL ex-fuel ex-VAT LFL of -2.3%, we expect our Q4/FY forecast of -1.7%/-0.9% to evidence a better exit rate,” says broker Nomura Securities. Translated into English, that means that after reporting a year-on-year fall in like-for-like (LFL) sales, excluding fuel and value added tax (VAT), of 2.3% over the Christmas period (the six weeks to January 7th), Nomura reckons fiscal fourth quarter LFL sales will be down 1.7% while LFL sales over the whole year will be down 0.9% compared to a year earlier.
“Although partially supported by increased couponing/promotional activity, we expect the early signs of improvement to be viewed positively,” Nomura added.
The broker is forecasting a trading profit of £2,465m, which would represent a 5.7% trading margin.
“Having implicitly guided to a 5%-plus UK trading margin for [fiscal] 12/13E … we think Tesco will add substance to its explanation of the UK reset by highlighting specific issues and remedies. Specifically, feedback from the 200 store trial adding more labour hours should provide tangible evidence from one of several key initiatives, and reassurance with respect to the level of investment required. Moreover, we also expect Tesco to outline plans to improve the ambience of stores by accelerating its rolling c.5-7 year ‘Refresh’ store refurbishment programme,” Nomura said.
The broker also expects Tesco to present a review of its property portfolio. “We expect Tesco to signal a phased reduction in its rate of UK space growth with a shift in emphasis away from large hypers towards smaller formats where it under-indexes versus the market. Sensibly, we expect multi-channel to be a key consideration with the potential to offer the UK’s most convenient click-and-collect network,” Nomura said.
Panmure Gordon has been doing a bit of shopping disguised as research – or possibly the other way round – and it thinks Tesco’s turnaround plan has a good chance of success. “However, as always, execution is key. Retailing is all about doing 1,000 small things correctly, the devil is in the detail, not in the Powerpoint presentation,” the broker observes.
Press reports suggest that a number of key shareholders have put pressure on Tesco to abandon its attempt to crack the USA. Investment analyst Sam Hart at Charles Stanley reckons the US operations’ losses will reduce from £186m last year to £120m. “The lower level of losses reflects a combination of a stronger sales performance and improved supply chain efficiency,” Hart said.
“Asia is forecast to report a 22% rise in operating profit to £695m. South Korea, Thailand, Malaysia and China are expected to have been the growth drivers. The underperforming business in Japan has been put up for sale and an update on the disposal process is anticipated,” Hart said.
“Europe is forecast to report a 9% increase in operating profit to £575m. Good growth in Poland, Turkey and Slovakia is expected to have more than offset softness in Ireland and Hungary,” Hart added.
US broker Jefferies expects Tesco to confirm "that the c.100bps [100 basis points = one percentage point] of net margin reinvestment (c.200bps inc the reversal of double Clubcard points) will be mostly focused on improving the customer experience (availability, service, quality of fresh....)."
"With Tesco's value proposition still strong in a market context, any reinforcement of the EDLP [every day low prices] message is likely to be funded by a reduction in promotional participation. We note that recent promotional intensity has certainly lifted Tesco's UK relative performance (but industry background price rises suggest that margin dynamics remain disciplined)," Jefferies said.
In recent times Tesco has been drawing in its horns, abandoning its second-hand car sale web site and putting back the launch date of Tesco bank, but one area that seems to be motoring ahead at full pelt is the Tesco.com web site, where the group recently announced plans to emulate Amazon.com and allow third-party retailers to sell goods on the site. As with Amazon, Tesco will be charging a transaction fee to third-party retailers on every sale they make.
As a well-established Internet retailer Amazon is a formidable competitor, but one area of advantage Tesco has is its physical retail network, which means it can offer "click and collect" services, predicted to be the next big thing in retail circles; it certainly beats "click and take a day off work, only to miss the delivery person because you had the radio on too loud" as a business model.
Already, garden equipment seller Crocus is selling its wares through Tesco Direct and more are sure to follow.
It is an example of Tesco using its UK market dominance to good effect, something it used to do well in its heyday but recently it seems to have lost its touch.
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