Tesco still a basket case

If Tesco was hoping that a return to like-for-like sales growth in the UK in the second quarter would earn it some love in the market, it was sadly disillusioned.

If Tesco was hoping that a return to like-for-like sales growth in the UK in the second quarter would earn it some love in the market, it was sadly disillusioned.

Not when supermarket rival Sainsbury reported second quarter like-for-like (LFL) sales growth year-on-year of 1.9%, which put Tesco's 0.1% gain in the shade.

Not when the price of getting the tills ringing like billy-o again has been an enormous investment in the UK stores which contributed to an 8.5% decline in underlying profit before tax to £1,759m.

Not when, just as management starts to get a grip on its problems in the UK, mainland Europe starts to look like a problem, with LFL sales down 0.8% year-on-year in the second quarter.

Not when a huge doubt still hangs over the US venture, where Tesco trades as Fresh & Easy. LFL sales stateside were up 6.9% year-on-year in the second quarter, but more than 70% of the US stores are still soaking up cash (before central overheads) rather than generating it.

Management's reputation dentedIn short, Tesco remains a company many people - whether they be investors or shoppers - find hard to love.

Tesco has always been able to live with that, because, while it may not have been widely loved in the way that, say, Waitrose is, it has been both admired and feared in almost equal measure.

The profit warning back in January put a dent in the management's reputation and only encouraged UK rivals to keep nibbling away at Tesco's market share, as they had been while Tesco's management had clearly been taking its home market for granted as it focused on overseas ambitions.

It is safe to assume that Tesco is now paying attention to the UK, given that Philip Clarke, the group Chief Executive Officer, took personal command of the business back in March, which prompted the resignation of the man previously in charge of Tesco UK, Richard Brasher.

Some in the City say that his job depends on "stopping the rot" in the UK. Others suggest that he could win himself plenty of breathing space if Tesco just abandoned its costly assault on the US, humiliating though a retreat from the world's biggest grocery market would be.

With failure like this, who needs success?Of course, success or failure here is all relative. It's like Manchester United only winning the title seven times in a decade instead of the 11 times [sic] their fans demand. Tesco's market share in the UK remains above 30%, comfortably more than 10 percentage points clear of its nearest rival, Asda, the firm owned by the world's biggest retailer, WalMart. Market research suggests that £1 in every £10 spent in the UK is spent in Tesco. In other words, no one is in any rush to compare Tesco with Woolworth.

Maybe a more apposite comparison would be with Microsoft or IBM, both companies which had a prolonged period at the top of their business, which ultimately yielded that position to nimbler competitors but which still remain formidable money making machines.

From an investment point of view, it does not look like Tesco is going to be rivalling online fashion retailer ASOS as a growth stock any time soon - although you can bet that if Tesco targeted the online fashion market, ASOS would be pretty worried (just ask Argos's management about the tribulations of having Tesco enter your market).

Investors who want to back the management's ability to turn things around will have the comfort of a 4.5% dividend yield to tide them over while they wait to see if Tesco can regain its magic touch.

JH

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