LONDON -- So far, 2012 has been an annus horribilis for Tesco (LSE: TSCO.L), the U.K.'s largest supermarket chain.
Thanks to weak consumer confidence, falling disposable incomes and feeble wage growth, British consumers keep tightening their belts. As a result, Tesco has seen its U.K. market share drop to levels not seen since 2005.
Sales still slipping
Last Wednesday, after Tesco shares dipped below the 3 pound mark, I suggested that they looked increasingly desirable to value investors and dividend fans. This morning, the Goliath of retailing released a trading update, giving me another chance to review its recovery.
In the first quarter of its 2013 fiscal year, covering the 91 days to May 26, U.K. like-for-like sales were down 1.5%, excluding VAT and petrol sales. This was hardly an improvement on the 1.6% drop recorded in the previous quarter, so Tesco's turnaround plan is struggling to gain traction. Also, revenue fell by 3.7% at Tesco Bank, which recently moved 2.8 million credit card accounts to its in-house systems.
However, thanks to international sales rising by 0.5%, overall LFL sales were down a mere 0.7%. Tesco's star performer overseas was the Fresh & Easy chain in the U.S. (up 3.6%), while Slovakia (up 3.4%), Poland (up 3.3%), and Thailand (up 2.5%) also did well. Then again, U.S. sales growth has slumped sharply from the 12.3% rise in LFL sales seen in the fourth quarter of fiscal 2012. Still, Tesco saw improved market shares in 11 of its 12 international markets.
Turning against Tesco?
Philip Clarke, Tesco's chief executive, said of these results:
Tesco has performed robustly in the first quarter, despite subdued consumer confidence in all our markets. We are rapidly implementing our six-point UK plan and I'm particularly proud of the relaunch of our Everyday Value range and the fact we have now put extra staff into 700 of our stores-in 500 of them within the last three weeks alone. Our customers are seeing the evidence of the changes we're making and they're telling us they like what they see.
Personally, I'm not sure that Clarke has his ear firmly pinned to the ground.
Whenever I've written or talked about Tesco this year, I've received overwhelmingly negative feedback on Tesco's customer service, product quality, and store layouts -- and many of these critics are now ex-customers. While this is purely anecdotal feedback, it does seem to represent a growing anti-Tesco groundswell of opinion. Nevertheless, at the top level, Tesco continues to generate skipfuls of cash, and its pre-tax profit hit an all-time high of 3.8 billion pounds in FY 2012. What's more, overall group sales are ahead 2.2% this year, thanks to store openings and expansion.
In addition, Tesco claims to be outperforming the wider U.K. market. The latest data shows that U.K. market growth declined from 3.7% in Q4 to 2.4% in Q1, down 1.3%. However, Tesco's own sales growth reduced from 2.3% to 2%, down only 0.3%. Hence, in this relative respect, it is beating its rivals, but this offers little comfort to shareholders.
Cheap shares on the shelf
As part of Tesco's six-pronged "Build a Better Tesco" strategy, the FTSE 100 giant has recruited, trained and put to work 4,300 additional new workers. A further 145,000 employees have been given specialist training relevant to their departments. More than 100 stores have been "refreshed," and 7 million Clubcard customers have been sent additional, more personalized mailings. Additionally, Tesco has made improvements to 350 of its Tesco Standard products, notably ready meals, while adding 500 brand-new products. Also, the Tesco Direct range now includes more than 100,000 nonfood products.
Although it wasn't included in these results, Tesco enjoyed a welcome boost from the Queen's Diamond Jubilee, notching up record weekly sales exceeding 1 billion pounds.
Tesco made no changes to market expectations for its full-year outlook, and as I write its shares trade at 301.2 pence, valuing the megagrocer at more than 24 billion pounds. As this price, its shares trade on a forward price-to-earnings ratio of 8.7 and offer a prospective dividend yield of 5%, covered a generous 2.3 times.
Despite Tesco's continued weakness in the U.K., it remains a cash-generating juggernaut. Therefore, I still firmly believe that its shares offer deep value at their current levels.
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