Wednesday, 16 April 2014

Tesco - Final Results

Lets be honest, Tesco has not had a good year!

At the time of last years results, the share price was 375p - it has since fallen back over 20% and the city vultures are closing in on CEO Phil Clarke.

So, what’s the reason for this decline and what‘s a small investor supposed to do?

Well for a start, they were unable to make a profit from many of their overseas expansions. In the US, after significant losses in previous years, they decided last April to cut their losses which wiped £1.2bn from last years profit for the group.

Secondly, they seem to have run into difficulties with their operation in China and have subsequently entered into a joint venture with China Resources. The venture into Japan has likewise been abandoned. Last month they launched a joint venture with Trent Hypermarket, a unit of Tata Group, to establish 12 Star Bazarr and Star Daily supermarkets in India.

This realigned strategy for their overseas operations incorporating greater support from local experts under local banners, and with less capital input, may prove to be more profitable in the longer term and probably has a better chance of success than the go-it-alone model.

Whilst they were busy getting into difficulties overseas, they took their eye off the ball in respect of their most profitable segment - the UK operation, and have lost market share to the likes of Sainsbury and more recently, the discounters like Aldi and Lidl. Inevitably margins, revenues and profits have declined and the board have felt unable to lift the dividend for the past two years.

The past two years has been spent trying to get the UK operation back on track. The company have just issued their full year results (link via Investegate). I was particularly looking for positive reassurance that the UK operation is making progress as it accounts for over 60% of Tesco group revenues, and in particular, food sales which account for around 90% of the UK total.

Unfortunately there was not much progress - UK  profits were down 3.6% at £2.2bn - these fell 3% in the fourth quarter, its worst drop in Phil Clarke's short tenure. It compares with a market-wide decline of 2.6%. On a more positive note, online sales increased by 11% and the smaller Tesco Express sales were up (LFL) 1.1%. The company said "Our performance in the year was not where we had planned it to be".

They announced a write-down charge of £800m mainly relating to a revised valuation of European assets.

Earlier this month their finance director Laurie McIlwee stepped down following rumours of a rift with the CEO over strategy.

Tesco Bank contributed profits of £194m - up 1.6%.

Overseas, group trading profit fell 5.6% in Asia and 28% in Europe, where trading has slumped in Ireland, Czech Republic, Hungary, Poland, Slovakia and Turkey. The group has taken big write downs totalling £734 million and a charge of £540 million charge related to its exit from China.

Free Cashflow Cover

One of the aspects I look for in results is the ratio of cash from operations less capital expenditure. The sum of this figure is divided by the total dividends paid for the year. I like a ratio over 1.0 and preferably over 2.0. The higher the ratio, the more secure I feel that the company can maintain a growing dividend.

This is an area where Tesco is struggling - at the time of last years results the ratio had fallen to just 0.2x however, I am pleased to note the board are keeping a close eye on this and this year it has risen to 0.6x  - still some way to go yet but a positive direction. Net debt was flat year-on-year at £6.6bn.

Another positive is the full year dividend has again been maintained at 14.76p per share, covered 2.1x by earnings and provides a yield of around 5% at the current price. 

Last year CEO, Phil Clarke put in place a strategy to turn around the company’s fortunes - I feel patience will need to be the order of the moment and suspect its going to take some time before shareholders see any significant benefits. I said at the start of the year that I would try to exercise more patience and avoid tinkering with the shares portfolio and as I can see some positive signs of a turn around, I will continue to hold in the hope that a stronger recovery can take hold.

The results were probably a little better than expected by the market and at the time of posting the shares are up 2.5% at 294p.


  1. Thanks - excellent post.

    I see that Tesco is tentatively venturing back across the pond, albeit armed with clothes this time rather than expensive veg. Hopefully they have learned something from their last experience there! So many UK chains seem to struggle to gain traction in the US but the prize on offer keeps them coming back.

    1. Hi FI,

      Thanks for leaving a comment and glad you liked the article.

      Yes, the F&F brand is to roll out 7 franchise outlets in the US - 4 in New York starting next month. Here's a link to the recent announcement

      The US is a huge market. I'm not quite sure what level of profit is generated by F&F - probably quite small but as they say - every little helps!