Analysts were today being bullish about the chances of a turnaround at Tesco despite new boss Dave Lewis being expected to report record losses in Wednesday’s annual results.
As well as trading profits, generally forecast to more than halve to around £1.4bn, there has been widespread speculation of a property write down of anything up to £4bn as well as ongoing speculation about a possible rights issue by Tesco.
However, analysts expect good news to be contained as well as bad in Wednesday’s results. Bernstein said it expected UK Q4 like for likes to be down -1.2%, a big improvement on Q3 (-4.2%).
“Kantar data and Christmas trading has already shown material improvements in Tesco’s trading,” said senior analyst Bruno Monteyne.
“Tesco will re-emphasise the broad strategy of service and availability and targeted prices and likely show progress on the operation and customer measures on which they judge themselves,” he added.
“Our own store visit and Grocer 33 data confirm the improvements across the entire retail proposition,” said Monteyne.
Clive Black, analyst at Shore Capital agreed that Tesco’s UK stores were “demonstrably better” on cleanliness, availability and merchandising, added: “Recent price cuts – e.g. eggs, fruit and fresh meats - suggest that there is another tweak to pricing taking place, now in basic private label foodstuffs rather than proprietary brands, so further narrowing the differential with the limited assortment discounters.”
David McCarthy, head of European consumer retail research at HSBC said he believed the markets would focus on Tesco’s long term momentum, where signs were positive, rather than its well-flagged record losses.
“For full-year results, the focus is usually on profits, but trading profit for 2014/15 has been well signalled, so we expect the market to focus on momentum and on cashflow for 2015/6 and beyond,” he said.
“The road to recovery will not be smooth, but we expect Tesco to continue gaining long-term momentum, and for this to be reflected in trading and consumer research.
“Long term we believe that Tesco should return to at least a 4% operating margin in the UK.”
The jury was out on whether Tesco will need - or want- to make a rights issue.
“We had thought previously that Tesco might undertake an issue to protect its credit rating, but as Tesco has lost this rating, it no longer needs such an issue in our view,” said McCarthy.
“We do not expect the group to really say too much more than has already been said on the subject of a fund raising at the preliminary results,” said Shore Cap’s Black, although he said the likelihood of a rights issue had moved from “90:10 against to say 65:35 against now. “
HSBC’s McCarthy added further hope for Tesco that the market will look more kindly on its results than some of today’s headlines suggested.
“We are not overly concerned about write-downs, “he said. “We have expected such write-downs for some time (even under previous management), but they will not change the economic value of the company, affect cash flow or change strategy.
“There is increasing evidence that discounter growth was as much cyclical driven as structural,” added McCarthy. “Their growth rates have halved, consumers’ incomes are recovering and Tesco (along with others) is lowering its prices. The discounters will keep opening stores, but their LFLs have slowed and it is not inconceivable that they could turn negative.”
No comments yet