Tesco’s chamber of horrors

Long-time rumours of Tesco squeezing its suppliers to bolster profits have more than a grain of truth to them.

Tesco has "begun to resemble a retail chamber of horrors", said the FT's Jonathan Guthrie. The supermarket giant announced a fourth profit warning this week, wiping another 6% off the share price, which is now down 50% since the start of the year.

Profits for the year to February 2015 will not exceed £1.4bn, a reduction of around 30% on the previous estimate and a far cry from the £3.3bn reported last year. This is partly because the group has decided to jettison accounting practices, many relating to deals with suppliers that "artificially" elevated earnings.

What the commentators said

Another tactic it used to resort to in order to inflate profits just before the end of the year was to cut staff hours after New Year and order fewer products to cut waste. Such "customer-unfriendly tactics" will now be ditched.

But these structural changes, however laudable, imply a fall in profits, and it's not easy to gauge how bad it will be, said Robert Cole on breakingviews.com. It depends on the response of suppliers, customers and competitors. Equally murky are the possible knock-on effects.

For instance, if the group's operations become structurally less profitable, the value of the huge property portfolio will also fall. "The next slew of bad news could well centre on the already strained balance sheet."

Meanwhile, Tesco still needs a clear strategy to reverse the rapid loss of market share to Aldi and Lidl, added Thao Hua in The Wall Street Journal. "The road to recovery will be a tough slog."

Chief executive Dave Lewis does at least seem to have understood that Tesco lost sight of the importance of putting customers first, said Chris Blackhurst in the Evening Standard. If he could "rid himself of management gobbledygook" too, that would be a bonus.

When MoneyWeek's share tipster Phil Oakley looked at Tesco in September (well before the latest profit warning), he pointed out that the company's tangible net asset value is just 134p per share. So even at current levels, the stock isn't obviously cheap.

Given all the uncertainty ahead, said The Daily Telegraph's John Ficenec, "investors looking for a pre-Christmas bargain should steer well clear of Tesco shares".

Recommended

Share tips of the week – 21 January
Share tips

Share tips of the week – 21 January

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Jan 2022
Seven cheap defence stocks to buy now
Share tips

Seven cheap defence stocks to buy now

We’ve got used to a world without war between major powers, but that era is coming to an end as Russia threatens Ukraine and China eyes Taiwan. Buy de…
21 Jan 2022
Invest in VCTs: tax-free investments set to break records
Investment strategy

Invest in VCTs: tax-free investments set to break records

Generous tax breaks make VCTs – venture capital funds – an attractive supplement to pensions.
21 Jan 2022
HubSpot: a tech stock set to tumble
Trading

HubSpot: a tech stock set to tumble

US tech stocks have had a fantastic couple of years. But this year is unlikely to be so bullish for high-fliers that can’t turn big profits.
18 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022