Thursday 23 October 2014

Tesco - Interim Results

one of the few positive areas!
Just days before new boss Dave Lewis was called up a month early, the food retailer warned of a further slide in profits and slashed the dividend by three-quarters.

A couple of weeks later and news that Tesco had suspended four executives, including its UK managing director, after the supermarket overstated its half-year profit guidance by £250m. It launched an investigation headed by Deloitte.

During this turmoil, the share price has taken a pummelling, falling over 40% from £3.34 at the start of the year to well below £2.00 in September.

Today the company has issued its delayed interim results for the 6 months to end August 2014 (link via Investegate).

The headlines

  • UK like-for-like sales down (4.6)%, impacted by strong competition across the grocery market, headwinds from price cuts and fewer untargeted promotions
  • £0.9bn Group trading profit - year-on-year decline reflects challenges of UK business
  • Total UK online sales up 11%; like-for-like sales growth of +0.8% in UK convenience stores
  • Interim dividend 1.16p confirmed;  full-year capex reduction to £2.1bn
  • New Executive team in place and reviewing all strategic options to create greater shareholder value

The Deloitte investigation into the validity of the figures has now concluded, and has confirmed  there was an overstatement in  profit expectations of £263m.  The impact to trading profit is £118m in the first half of this year, with a further c.£70m relating to the previous year and c.£75m relating to pre-2013/14 treated as one-off items within these results.

In addition, the chairman Sir Richard Broadbent has agreed to step down, which I think was inevitable given the record under his 3 year tenure of office. Just wondering what his pay-off package will amount to?

There was no hint of any decisions on the final dividend - I expect this will now come with the Q3 update in January - I am still hoping for something less severe than the 75% cut to the interim.

On the positive side, Tesco Bank's trading profit increased by 15.9% year-on-year to £102m, driven by strong lending growth.  Excluding fair value releases, trading profit grew by 18.8%. Tesco's UK online sales continue to increase as do sales from the smaller convenience stores.

Net debt increased by £500m year-on-year to £7.5bn.  This included the impact of the reduced level of operating cash flow and the investments in the China and India joint ventures.  The increase was partially offset by the disposal of China net debt and lower capital expenditure. The management have ruled out a rights issue to bolster the balance sheet so I imagine they must be looking to raise capital from disposals of non-core assets - maybe Dobbies garden center would be a good place to start?

All in all, a pretty gloomy picture and it looks like I was too hasty to jump in with my top up of shares last month. However the turnaround is underway and although there are sure to be a few more bumps along the road, I have every confidence the new CEO and his team can get things back on track. Sainsbury went through significant problems over a decade ago before finding stability again and restoring the dividend and shareholder value under Justin King.  

Tesco is still a very large business whose fortunes can and will be restored. At the time of posting, the shares are down 5% at 173p.

Once again, patience and a focus on the longer term outlook is the order of the day. More on this in early January.

Be interested to hear what others think of Tesco - feel free to leave a comment below.


  1. A falling knife.There are secular changes underway beyond the terrible way that Tesco has been run. Declining disposable income is driving people to be more thoughtful in their shopping. People are wasting less food They are adapting their shop away from big weekly and monthly shops. Online shopping is compressing margins. The squeezing of suppliers has come home to roost (expensive poor quality produce), and the discounters are making Tesco look very bad. There are far better places for my money to go long. - I am short Tesco

  2. Hello Underscored,

    Thanks for taking the time to share your views - all valid points. I agree that shoppers are changing the way they shop but there is no reason why Tesco cannot also adapt. I think the new management team will be well aware of the reasons for the problems over the past year or two and will make the necessary changes to bring about a recovery.

    Tesco is still, by far the UKs largest supermarket, has some first class sites, is leading the way with online shopping, is rolling out a profitable convenience store operation, and has some exciting opportunities in China and India.

    Short term struggling but I remain a holder for the long term.

  3. Thanks for the nice blog, you have certainly drawn my attention to investment trusts, not something I had previously given attention too.

    Regarding Tesco, only time will tell us in the end :)

  4. I think Tesco will rebound but not to the levels of 300p which was for share price before this turmoil started.
    I want to take pick between big 3 super markets and I thought Morrison's was good starting point. But things are generally degrading day by day. I am avid fan of Lidl and Aldi and only use Tesco Express for some small purchases near my office. Recently I visited Sainsburys and I thought I was out of place as things were so expensive as compared to Lidl /Aldi. I feel now is time to invest before any analyst give any recommendation as by that time, it will be too late. But again, it is big gamble and I am sticking to my core holding of Unilever, British American Tobacco, Compass Group, Diageo, SSE plc, Vodafone, GSK & Royal Main (IPO purchase). For rest of amount, I am fully invested in ITs like Temple Bar, CTY, MYI and MRCH. If I want to add anything, I will add either BP/RDSA or HSBC.

    Some of the picks highlighted by your blog such as RPC group or DS Smith are also good.

    1. Hi,

      Thanks for leaving a comment - it is often said the time to buy is when others are fearful...whether to buy supermarket shares now or wait for further weakness, and which one are questions only the individual can answer.

      I jumped in a little early with top ups of Tesco and Sainsbury last month. You seem to have a decent collection of core holdings in your portfolio plus some decent investment trusts - the manager of Temple Bar is a contrarian and has been accumulating Tesco in recent months - be interesting to see his portfolio update in due course and find out what else he has been picking up in the sales.

      Good luck with whatever you decide!