Tesco, the UK’s leading supermarket, is having one of its worst results ever in the stock market. Its dominance has slipped rapidly as low-cost rivals and smaller chains seize territory. With its market share in February this year showing a 30.3 percent drop compared to last year, shareholders have every reason to be concerned. It is currently trading at its lowest share price, comparable only to 2005. There are several factors that could have contributed to its continued financially worrying performance.
When the company released its Christmas statement, its share price stumbled 20% a day. This was shocking, especially coming from one of the FTSE’s most reliable blue chip stocks. January came and many of the shareholders were contemplating selling, fearing more trouble. Others sold, others bought, while another group decided to hold on. Where did the rains start to hit the Tesco?
In the recent past, there is no doubt that the company’s performance has been impressive. Shareholders have not had to worry like year after year; profits have been reported despite the fact that the growth rate has slightly receded into the background. In its fiscal year 2010/2011 which ended, Tesco posted around 8% profit. When the 2011/2012 mid-year revenue was reported in October 2011, there was still little sign of trouble, as the company had reported an impressive 8% growth in revenue. For the third quarter, everything seemed fine despite the drop to 5%. This decline was just the tip of the iceberg, the real scare came with Tesco’s Christmas trading statement.
On a closer look and analysis of comparable UK revenue growth, you are exposed to negative figures. Despite the negative like-to-like, overall UK revenue grew, thanks to 3% growth from newer stores as well as new floor space. However, space growth is likely to slow and the potential will leave UK sales flat in 2012/2013. This is due to Tesco’s plan to cut UK capital spending.
The company’s overall performance in Europe was not impressive. By contrast, the US operations achieved 40% revenue growth and a remarkable 20% like-for-like growth. Although the US only accounts for a meager 1% of Tesco’s total revenue, analysts see these numbers doubling every 2 years. In ten years, well, US operations alone may contribute up to a third of Tesco’s total revenue, that is, if ambitious US growth is sustained.
With all factors constant, including huge growth in the US, we can see Tesco’s revenue grow 50% in ten years, that’s an average annual growth rate of 4%! Many shareholders have held Tesco shares because of the dividends, which have been steadily rising for the past twenty-seven years, in line with their earnings. Is this reason enough for you to hold on?
What if you buy and expect the international market to redeem Tesco, and still expect it to maintain the 50% growth that is estimated in 10 years? This means you can double your money in 2022! The company has embarked on an ambitious customer service overhaul to redeem its image. Besides that, what about the “earn while you learn” program? Only time will tell.