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They say bad news comes in threes, so Terry Leary must be nervous. At the beginning of the week US retail giant Wal-Mart unveiled plans to start rolling out its own convenience store format similar to Tesco’s burgeoning Fresh & Easy US experiment. Whack! Just a day later the UK supermarket colossus, a firm that had once seemed incapable of doing wrong, found that it is no more immune to the vagaries of investor sentiment than anyone else, its unveiling of seemingly solid Christmas sales figures was met with a big market thumbs down and a chunky 3%-plus share price nosedive. Thump!
Never mind that overall group sales rose 12.8% in the six weeks to 5 January, that international sales jumped 26.9% (including a 30% hike in Central Europe), or that its online sales zipped 24% higher to £190 million, all this good work was undone by its bread-and-butter business – sales from British stores. These were no disaster – UK like-for-likes still rose, up 3.1%. ‘Every little helps’, just as long as it’s not too little.
Still, coming at a time when almost everyone else in the retail space is suffering post-Christmas indigestion, the market’s reaction may seem a bit, well, reactionary.
Or maybe there is a bleaker side effect lurking to this trend, some as yet unforeseen blow that might leave it reeling about like a battered boxer.
The bigger they are, the harder they fall, right? Well if that’s the case, start running now because Tesco’s near £33 billion market value could leave one heck of a mess, and its sheer size and scale could become its biggest millstone.
Roughly £1 in every £8 of UK retail spend goes through Tesco’s tills, a mind boggling figure when you stop and think about it. The weekly food shop? Tesco. Winter pullovers? Tesco. New plates for the dinner table, a lamp for the shed, that new DVD player? Tesco, Tesco, Tesco.
The latest figures from market research organisation TNS shows that Tesco has a market share of 31.5%, compared to ASDA and Sainsbury on 16.7% and 16.4% respectively.
Faced as we are with an accelerating retail slowdown, maybe even a full blown recession, the supermarket has virtually no room to manouvre, and its going to feel any change in consumer spending, be it a gentle decline, or off the face of a cliff.
William Hobbs, equity analyst at Barclays Wealth, admits to taking drastic action recently, saying ‘we took Tesco out of our analyst portfolio before Christmas to replace it with Morrisons, and since then Tesco has underperformed its northern rival by some 23%.’
Tesco has been a long standing favourite of ours here at Shares, as regular readers will know, and many other market commentators have taken up the baton too, prompted by the uncertainties that shroud the stock market today. Food, after all, is a consumer staple so it will surely prove more defensive than the wider retail market.
But everything has its price. No matter how fast a company is growing, how consistent its track record, how fat and secure its dividends, or how savvy its management, everything has its price. So while Tesco ticks all of these boxes in a way that few other firms could hope for, maybe a PE of 16-odd is its price.