Tesco’s problems just got worse
Could things get any worse for Tesco’s after this morning’s surprising profits warning and dividend cut, which sent the shares back to levels last seen in 2003, with a low of 222p in early dealings just after the open.
The move below the 2006 lows this morning at 242p, could it be argued, herald the potential for further declines in the company’s fortunes, but with the shares already down over 30% year to date the question now being asked is whether all the bad news is priced in.
Tesco’s problems aren’t unique to it with its peers in the sector Sainsbury’s, Asda and Morrisons getting buffeted by similar headwinds in the retail sector as all lose market share to the young upstarts of the retail sector as Aldi and Lidl eat into their market share, at the bottom end and Waitrose at the top end.
This morning’s announcement has all the hallmarks of a clearing of the decks as the new CEO Dave Lewis starts work on Monday 1st September. The key question being asked now is whether these actions will be enough to stop the haemorrhaging of value that we’ve seen in the past few months.
The company has announced it will be cutting capital expenditure and slowing down its store revamp programmes, as it works to stem a slide in its market share from levels of 30.2% a year ago to 28.8% now.
Given the presence of the new kids on the block and pressure on consumers wallets the company will have to work very hard to stand still and given its market share and the lower cost bases of the budget retailers it almost seems inevitable that we will see further erosion in that market share, towards the 25% level.
In that regard when you are top of the pile the only way is down, just ask Manchester United.
What that means for the share price is anyone’s guess but from a purely confidence point of view we would need to see a significant move back above the previous lows at 240p to increase confidence that we are near to a short term base.
The one thing Tesco does have on its side is its size and scale, in that it can afford to shrink its margins further, and in the process squeeze its competitor’s margins that much harder.
That may not be good for the share price values of the food retail sector, but it’s bound to be good for the consumer’s wallet as the weekly shop gets cheaper.
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