LONDON -- It came out of the blue, slashing nearly a quarter off the share price. Tesco's (LSE: TSCO.L ) profit warning in January -- its first for 20 years -- divided investors between bulls who saw it as a temporary glitch and bears who saw more serious writing on the wall.
It wasn't just among private investors that opinions were sharply divided. Investment guru Warren Buffett rapidly upped his stake to over 5%. But high-yield fund management superstar Neil Woodford took a bearish view, selling out completely in April.
So how is Tesco faring now?
As far as the share price goes, there is little indication of recovery. At 338 pence, they are still 16% below their early-January high of 411 pence. But there is some indication they're slowly clawing their way back. They are up 6.5% from the post-profit-warning low, during which time the FTSE 100 has gone nowhere. Meanwhile, rival J Sainsbury has motored up 14%, and William Morrison has slipped 3%.
Tesco's sin was one of hubris -- perhaps not surprising in the light of former CEO Terry Leahy's very long and successful tenure. It took its core U.K. grocery business for granted and neglected it in favor of exciting growth opportunities internationally and in nonfood businesses from out-of-town hypermarkets to banking.
Nemesis came when the U.K. shopper woke up to Tesco's poorer customer service and product offering, and its grocery market share slipped. Meanwhile, the new markets proved tough. Internationally, Tesco lacks the market power it has at home, hypermarkets found online competition tougher than was expected, and some new ventures such as second-hand cars were just a step too far.
Tesco's act of repentance, unveiled by new CEO Philip Clarke in April, was to refocus investment on the core U.K. grocery. Store expansion would be cut back, while more would be spent on refurbishing existing stores, improved staffing, and price promotions.
Is it working? Competition in the U.K. grocery sector is rather like trench warfare. Tesco's market share is around the 30% level -- roughly double that of each of its big three rivals, Sainsbury, Morrison and Wal-Mart-owned Asda. A big push in sales translates into just a small increase in market share.
Tesco's market share has continued to slip all year, but recent figures hint at a turnaround. Measured over the 12 weeks to Aug. 5, its market share slipped marginally to 30.9%, but in the final four weeks of that period, it rose to 31.4%, according to data from Kantar Worldpanel. In those four weeks, sales grew 5.1%, ahead of Asda at 4.9%, Sainsbury at 2.7%, and Morrison at 1.4%. It's a very small sign, but as the company says, "Every little helps."
Not all are convinced. Asda hit out at Tesco's complex promotions, describing them as "basket bingo." ING's analysts have suggested that Tesco needs to make much deeper price cuts to stop customers switching to Asda. Meanwhile, Tesco's international business has its own headaches, with the U.S. stores still making losses and the business in Korea hit by government regulation.
So Tesco shareholders can expect to wait a while yet before the shares recover their previous levels. But Tesco has the market and financial power to claw its way back, and I remain a patient bull.
A good run
Sainsbury's share price has had a good run over the summer, matching its sales success over the period. Up 12% since June 1, they look a little expensive at 324 pence, but with tangible net assets of about 290 pence and a yield of 5%, they remain a good defensive investment.
Morrison makes a virtue of its slowness to act. It is only now rolling out a plan for a chain of convenience stores, long after Tesco and Sainsbury. Having eschewed hypermarkets, its chief executive has recently dismissed them as "a blip on the pages of retail history." And its adventures into nonfood retailing have been specifically confined to its acquisition of baby-goods retailer Kiddiecare.
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