In today’s first-quarter trading update, Tesco (LSE: TSCO) boss Philip Clarke said price cuts, enhanced rewards through Clubcard Fuel Save, cheaper online grocery services, and store refreshments, “are making a real difference for customers”.
However, his efforts over more than two years of trying to turn the business round have yet to make a real difference for shareholders.
The company reported a 3.7% decline in UK like-for-like sales — against a comparative quarter in which sales were depressed by the horsemeat scandal. There’s no return to positive like-for-likes in sight, and Clarke’s comments in the results and on a conference call amounted to a plea for more time.
Tesco’s shares are down 1% at the time of writing, a number of shareholders reportedly have their knives out for the beleaguered boss, and most City experts remain downbeat on the company.
Veteran retail analyst Clive Black, of Shore Capital, said he had “never been so gloomy about Tesco’s prospects in 20 years”.
Clarke’s strategy is under fire from many analysts. Mike Dennis at Cantor Fitzgerald believes: “Investors should be questioning management’s strategy and why the prior year’s UK investment has led to falling sales”. Bernstein’s Bruno Monteyne finds the strategy “unconvincing … the only thing that has accelerated are market share losses”.
Analysts at Cazenove, in addition to questioning aspects of Tesco’s strategy — “capex, restaurants and gyms are unlikely to be the solution, in our view” — are not convinced by Clarke’s explanation of the weak UK sales.
On Clarke’s claim that a reduction in couponing accounted for half of the underperformance against the sector, Cazenove note: “Asda cut couponing to zero last year, yet it is delivering 4ppt better LFLs than Tesco”. On Clarke’s claim that store refreshments are having an impact, Cazenove note: “Tesco refreshed 35% of the space last year, which management says is delivering +3-5% sales uplifts. We struggle to understand how this can be a net negative factor”.
The robustness of some of the other numbers coming out of Tesco has also been questioned by the Bernstein analyst Monteyne: “Concerns about the quality of the earnings and accounting principles pose a risk of further write-downs or profit resets”.
Following the announcement of the resignation of Tesco’s finance director Laurie McIlwee in April, Philip Clarke is currently the only executive director on the board. While Clarke’s future is the subject of much speculation and rumour, Shore Capital’s Clive Black sees Tesco’s current plight emanating from a different source: “The present [Board] structure and performance does not reflect well upon Tesco’s chairman [Sir Richard Broadbent] in our view”.
