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Will You Be Celebrating Tesco's Results?

By Harvey Jones - Apr 15, 2013 at 7:15PM

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Harvey Jones asks whether investors in Tesco will be smiling on Wednesday.

LONDON -- All good things come to an end, as the U.K.'s largest supermarket Tesco (TSCO 0.19%)(TSCD.Y 0.00%) discovered in January last year. The failure of its 500 million-pound Big Price Drop Christmas 2011 campaign wiped 25% off its share price and 5 billion pounds off its market value. The share price has rallied since then, but will the recovery continue after it publishes its preliminary trading statement on Wednesday?

I have a personal interest here. I took advantage of the big share price drop to buy Tesco last year at 3.22 pounds in November, and I'm glad I did. This morning, Tesco trades 20% higher at 3.88 pounds. A positive Christmas trading statement in January was a big help. Wednesday's results could prove more problematic, however, with reports suggesting it faces its first drop in profits in 20 years. Tesco's market share has now fallen to less than 30%, according to Kantar research, its worst showing in eight years. And you can't blame it all on horsemeat burgers.

A giraffe and horse story
Once unassailable, the public mood has turned against Tesco. Roaming around an out-of-town Tesco Extra superstore can be an alienating experience. Its aggressive attempts to set up shop in every village and hamlet have provoked a backlash from local campaigners and shopkeepers. Aldi and Lidl have done downmarket better, and Waitrose has cornered upmarket. The Tesco checkout experience is variable, with regular customer complaints about surly staff (my girlfriend wasn't happy on Friday). Tesco has responded by playing nice, taking on more staff, buying a 49% stake in artisan coffee shop brand Harris & Hoole and spending 50 million pounds on child-friendly restaurant chain Giraffe. It hopes to spruce up its demographic, but will it simply toxify these brands?

Tesco to go
Tesco fluffed the U.S., where its Fresh & Easy chain crashed and burned. Management got the marketing wrong, they got the packaging wrong, they got the customer experience wrong. How could Tesco travel so badly despite extensive consumer research? One trip to a U.S. supermarket will tell you the Yanks like someone to bag their shopping for them, making self-service tills a no-no. The market anticipates the death of the U.S. venture, at a cost of 1 billion pounds. At least, that will put an end to its losses, which could freshen up the share price. This unhappy episode also pinpoints another worry about Tesco: Investors were willing to give Fresh & Easy time because it was the brainchild of CEO Sir Terry Leahy. His successor, Philip Clarke, doesn't have that luxury.

Brokers remain positive. Last week, Deutsche Bank raised its share-price target from 3.94 pounds to 4.40 pounds and reiterated its buy recommendation. UBS is also a buyer, hiking its price from 4 pounds to 4.30 pounds. Rumours are flying that Warren Buffett is set to increase his stake to around 10%. As for me, I'm holding, a little nervously. Will Tesco's six-point turnaround strategy deliver the goods? Will management succeed in "Building A Better Tesco"? We will find out more on Wednesday. For now, the champagne is on ice.

Fund management legend Neil Woodford sold the last of his Tesco shares 12 months ago. You can find out which FTSE 100 stocks he prefers by reading our special in-depth report "8 Top Blue Chips Held by Britain's Super Investor." This updated report is completely free and shows where Invesco Perpetual's dividend dazzler believes the best high-yield stocks are to be found. It won't cost you a penny, so download it now.

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