Last week I looked at supermarket chain Morrisons, which has been down in the dumps the past year as a result of continually losing money. I suggested that investors might be in for some near-term gains if things turn around.
There are a lot of comparisons being made between Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) and Morrisons right now, but I don’t think they are justified.
Tesco isn’t losing money but it may be dangerously close to doing so, and that makes it an especially hairy bet right now, whatever temporary goodwill investors might give the latest month-old chief executive Dave Lewis in the short run.
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Tesco’s story might superficially appear to be similar to Morrisons given that both stocks are down 40% in value in the past year, but that’s about where the parallels begin and end.
No Comparison
While Morrisons’ management is on top of its game, addressing its price promotions and other flaws in the business model, Tesco by contrast has trouble even retaining consistency at the top management level. It’s miles away from identifying what is wrong with the business and putting right its wrongs.
What small moves it has made in that direction appear to have been insubstantial at best and harmful at worst. Last year, the supermarket retailer sold its North American chain of 150 Fresh & Easy stores to conglomerate Yucaipa. However, that ended up costing the company £150 million, including an £80 million loan that Tesco had to extend to induce Yucaipa to buy in the first place. Worse still, it appears to have cost the retailer sales.
The reality is that there is not just something wrong with Tesco’s business, but the whole business model. Tesco, once the darling of the discount food business, has been shoved aside so hard by rivals Lidl and Aldi in recent years that it was forced to rebrand itself as a mid-market retailer and global food court. That non-strategy ended up with the North American flop. Today, its own executives don’t even know what it is.
While there has been erosion at the bottom of the company’s income statement for years, Tesco was for a while able to pump-prime its short-term sales targets due to its massive reach. Now that reach is shrinking and sales are evaporating.
In fact, the past four quarters of revenue declines have happened so rapidly that the company reported its poorest sales performance in more than 20 years last quarter.
In the penultimate half-year period, sales dropped 0.5%; then, in the 26 weeks ending February 2, they dropped another 1%. On June 4, the company said that quarterly sales plummeted 3.1%. There could not be a clearer sign of an accelerating trend underway.
Retail Roulette
Since last month when Philip Clark was ousted from pole position, there is some hope that Tesco’s new boss, an ex-Unilever honcho who’s accustomed to dealing with business models that straddle multiple consumer product complexities, might make amends. But so what?
On a five-year basis, while earnings are down 65%, the stock is only off 41% anyway, suggesting there is much further to fall. When there is such a clear path of sales and earnings declines combined with a revolving top management team trying to figure out what’s going wrong, who wants to take that kind of risk for a short-term bump that’s akin to retail roulette?
It might end up that David Lewis’s big move is selling the company in chunks and slices to various cash-rich buyers, by which time Tesco will be unrecognisable all together. In which case, if you’re a private equity fund manager, you should give Lewis a call; but otherwise, just forget about Tesco altogether.
