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Tesco [TSCO] share price: will its centenary year be a crucial turning point?

The Tesco [TSCO] share price had a good run-up ahead of announcing its annual report and financial statements for 2018 on 10 January 2019, rising over 13% since 31 December.

The supermarket chain’s stock has enjoyed a further 2.5% surge, reaching a three-month high of 224.5p on 18 January after outshining its rivals with a 2.2% rise in like-for-like sales in its UK stores over the six-week Christmas period, beating rivals Sainsbury’s [SBRY] and Morrisons [MRW].

Powered by CMC Markets, as at 30 January 2019

 

Sainsbury’s missed forecasts with a 1.1% fall in third-quarter sales, while Morrisons reported a 0.6% rise in Christmas sales. Out of the ‘Big Four’ supermarket rivals, Tesco has the best P/E ratio at 19.71 and is due to pay a dividend of 5.35p per share followed by a dividend of 7.5p per share in the next financial year, putting the stock on an attractive forward dividend yield of 3.5%.

 

Market cap£21.48bn
PE ratio19.71
EPS (TTM)11.20

Tesco stock vitals, Yahoo finance, as at 30 January 2019

 

Tesco says the earnings beat was due to improvements in its own-brand ranges, which helped deliver its best Christmas in nearly a decade. It also marks its twelfth consecutive quarter of growth.  

“As a team we have achieved a lot in the last 19 weeks. In the UK we delivered significant improvements in our competitive offer and this is reflected in a very strong Christmas performance which was ahead of the market,” Tesco’s chief executive, Dave Lewis said.

As Britain’s biggest retailer, the increase contrasted with an industry survey that showed UK retailers failed to increase holiday sales for the first time since the financial crisis with Brexit worries taking hold of consumer sentiment.

Tesco claimed it’s “firmly on track to deliver” good results for the full year, which will be released on 10 April.

 

Cost-cutting

As part of Tesco’s strategy to reduce operating costs by £1.5bn, it announced 9,000 job cuts across its stores and head office as it looks to simplify the business and its processes in order to “remain competitive”.

More than 10,000 jobs have been cut since Lewis took over in 2014 and the company has delivered cumulative savings of £820m to date.

Tesco also said that it will close food counters in 90 of its stores, simplify merchandising and implement changes to how it manages stock in an attempt to fight back against the discounters Aldi and Lidl, which are taking an increasing share of the market with two thirds of UK households visiting a discount store over Christmas.  

£820million

Cumulative savings since Tesco CEO Dave Lewis took charge

 

Fraud investigation

Scrutiny will shift back to the business following the culmination of an ongoing fraud investigation.

Former finance director Carl Rogberg was acquitted of all charges earlier this month. The decision means that Rogberg alongside former UK managing director Chris Bush and UK food commercial director John Scouler have now all been cleared of inflating the supermarket’s 2014 profits by £250m.

Meanwhile, “serious questions” about the way the case had been handled will be asked of Tesco’s leadership after a deferred prosecution agreement was reached between the company and the Serious Fraud Office.

 

Brexit on the horizon

Tesco is operating in a sector that could be hit hardest by a no-deal. Alongside Sainsbury’s, Tesco has been stockpiling freezer space so that, in the event of a hard Brexit, the business will be able to carry on operating.

Lewis has been bullish in the past about a no-deal scenario’s impact on the British food industry, having been quoted as saying that a no-deal could have nominal implications for food quality although conceding price would likely increase.

However both Tesco and Marks & Spencer [MKS] revealed on 11 January that they had started stockpiling food and had “sat down with all suppliers to discuss their production capability, where they hold stock and if we can help them hold it".

Lewis’ leadership has resulted in little criticism so far; the company’s performance in Central and East Asia are among the few blights in his tenure with profits plunging 18.4% in 2018 due to restrictions on store opening hours in Korea, political instability in Thailand and economics problems in Malaysia.

In the company’s Christmas statement, Lewis assured that “negotiations with suppliers [in Asia] are concluding satisfactorily” and that off-licence chain Booker was performing well as it approaches the one-year anniversary of the £4bn acquisition.

“negotiations with suppliers [in Asia] are concluding satisfactorily” - Assurances from Lewis over the company's stuttering performance in Asia

Like-for-like sales at Booker grew by 11% in the third quarter of 2018 and 6.7% in the year’s final weeks. Certainly, there are encouraging signs there for prospective investors in the company.

As Tesco enters its centenary year, the challenges persist. Its rebounding share price and P/E ratio reflect value for money in a sector bracing itself for the worst.

The big question for shareholders will be whether Tesco can perform well enough to leapfrog its big four rivals to make it the second-most valuable supermarket stock on the London Stock Exchange in the first quarter of 2019.

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