The Case For/Against Tesco
I wasn't expecting to be writing on Tesco (LON:TSCO) again so swiftly, but they shocked me via their trading statement today, which in effect has seen the big changes all brought forward. Of note, the full year profit target has been slashed from £2.8bn to £2.4bn. A profit warning was half expected, but the real shock has been the size of the dividend cut:
"The Board is focused on maintaining a strong financial position in order to maximise its business and strategic optionality. Reflecting this and our current expectations for future performance, the Board anticipates that it will set the interim dividend at 1.16p per share - a reduction of 75% from last year's interim dividend."
75%. Wow, no wonder the shares are down near 7%. However, the move should save them about £280m if upheld, which is interesting considering they are also reducing planned capital expenditure for the year by £400m. So in one failed swoop, they've either decided Clarke's plans were no good, and thus cut them short; or they've built up some reserves for the new CEO to play with, or they're saying we need to preserve capital to protect our balance sheet. It is of interest that the £400m reduction of capital expenditure matches the £400m drop in expected profits, so I'm guessing a mixture of the three, with the dividend cut more about building up some financial headroom for the new CEO.
Speaking of the new CEO, they've brought forward his appointment by a month, with Chairman, Sir Richard Broadbent stating:
"Our new Chief Executive, Dave Lewis, will now be joining the business on Monday and will be reviewing every aspect of the Group's operations. This will include consideration of all options that create value for customers and shareholders."
This is a smart move, the Christmas trading period is of massive importance to the supermarkets, so giving Lewis more time to prepare for the build up is prudent to say the least. But in reality, the question is what can he really do. Aldi and Lidl have caught the imagination of the masses, and if you consider for years the newspapers have been focussing on the big four, highlighting the continued rise of food prices, the continued rise of profits those food rises brought, it's not surprising. Not only do Aldi and Lidl appeal to the people who were struggling to buy enough food to eat, they appeal to a group of people who have come to the belief that 'Corporate Britain' was merely pushing up the price of food to fuel profit growth.
However, the question is, can Aldi and Lidl continue to engage in such aggressive price wars. This is a question that is difficult to answer, as there is no way to check the profits or losses of Aldi or Lidl, as they are private companies. But if you dig around, you can get an idea of the profits the groups make. Retail-week report that Aldi, for the year 2013, saw operating profits rocketed 450% to £103m as turnover rose 29% to £2.7bn. Lidl is a little more difficult to work out, but in the Daily Mail it is written:
'While Lidl does not publish its profit figures it did say it made sales of £3.3bn in 2013 and will hit £4bn this year. Recently it also revealed it paid more than £25m in tax on the profits earned here in 2013."
To me that sounds like they did not make an actual profit in the UK. If they did, why not state it, like Aldi. I would say they made a profit on currently open stores, hence the tax bill, but due to their current expansion plans and the price war, actually were loss making.
Speaking of the expansion plans. They perhaps make for the most interesting reading. At current, they have 600 stores, but UK boss Ronny Gottschlich says there are plans to open between 20 and 40 stores a year, with an overall goal of 1,500 stores. Big goals, which if you add to his claims that they no longer see themselves as discounter, but a supermarket, make for tough reading. However, I believe that statement is more him trying to boost their image, which is lagging at current (more details to come on that).
Moving onto to Aldi, at current they have 480 stores, and have plans to open between 50 and 65 a year between now and 2021. So, between them the two, there are plans to open at least 70 stores a year. Not good for the big four. But also, bad for Waitrose, who has just announced their second profit warning, mainly due to the actions of the big four in lowering prices, which has seen punters spend more at the big four on luxury foods, and thus less at Waitrose (the reason why is easy to see, the big four are discounting luxury items to bring people into their stores, which hurts Waitrose).
Rather interestingly, I spoke to my mother about why she no longer shopped at Tesco. Her answer was simply that a Sainsbury's opened, which was closer and had better parking. I asked her if you would ever shop at Lidl or Aldi, and her answer was not unless they started selling the branded foods she liked, like Heinze, HP, Jacobs. For a discounter, she prefers using Iceland or Herons, who offer branded products cheap. What was very interesting was her use of Marks and Spencers, where she purchased more upmarket food items. So she would get some things from Marks and Spencer's, some things from Iceland, then the rest from Sainsbury's. How much she purchased at Sainsbury's depended on what she had managed to get on the cheap from Iceland, Herons or even Wilsons, bar a few select items, what she purchased from Marks and Spencers depended on what she managed to get from Sainsbury's on the cheap.
I asked a number of other people, from friends, to colleagues, and they all near enough said the same thing, though for different shops. Tesco was closest for some, so they did their main shop there, Asda was closest for some, so they did their main shop there. A big factor was ease of parking, and a big dislike was stores that were too big (Tesco was a big offender on this, followed by Asda). Now to the main point, I asked all these people if they would use an Aldi or a Lidl. It was even-steven. Some said they would, some said they wouldn't. The ones that said they wouldn't mainly stated they preferred buying their branded foods, hence, why they liked Iceland as a discounter. The ones that said they would weren't bothered about the brands. Also, they all used Waitrose or Marks and Spencers to purchase more luxury foods, but only if they couldn't get those items on the cheap in a supermarket. However, I got the feeling that some thought shopping their was below them, especially Lidl, Aldi faired better, seeming to be like a Primark. But Lidl was compared by some to like shopping at Netto.
This I found interesting, it has been well documented that Lidl has something of an image problem, which is why they are folking out £20m on a new ad campaign. But it also shows that they are very much seen as discounters, and discounters tend to do well when the masses are struggling, but not so much when they are not. So, whether Lidl or Aldi continue to batter the big four is up for debate. However, one thing is certain, one of them at least, namely Aldi in my view, is going to continue to eat into market share, and come 2021, I would suspect them to be a firm favourite for the lower earners, and less food conscious. This poses an issue to the big four, which brings me to strategy, and back to my learning's from asking my friends, family and acquaintances about their shopping practices.
The big four mainly operate by offering three product ranges. Cheaper own branded foods, which appeal to the lower earners; middle range branded foods (HP, Heinz, Kelloggs etc), which appeal to the middle classes, and then the more expensive brands, which appeal to the middle and upper classes. In the budget food branded area, Aldi and Lidl are the main rivals (Iceland, Heron etc are more convenience stores), and have been for a long time (Aldi came to the UK in 1989, Lidl in 1994. There have also been a number of others that have come and gone, from Netto to Quik Save. But it is only in the last couple of years that discounters have become a real threat.
The change you could argue has been coming, with the likes of Primark and other clothes retailers showing that when it comes to the necessity's, people are no longer so fashion conscious. In effect, it doesn't matter, the question is, are they here to stay? Primark certainly is, so I'd image at least one of them (Aldi in my view), will continue to eat away into the big fours budget items. The middle brand range branded area I believe is relatively safe. However, in the more expensive range, right now, the big four are more of a threat to Waitrose than Waitrose is to them, because as history tells, selling luxury items on the cheap, like the big four appear to be doing at current, is one guaranteed way to get people into stores, and if people get used to buying those luxury items on the cheap, they may be reluctant to pay full price. That will hurt Waitrose.
To conclude, there is only one thing that is certain about the supermarket groups, the dynamics of the sector are changing, and the groups that best adapt will win out. I believe Tesco will be one of those winners, namely because they have the size, the financial clot (albeit, with their debt now so high, not as much as they once had, but they still have leg room), and the convenience factor i.e. they are everywhere, and people tend to pick the supermarket closest, which in a lot of areas is Tesco.
My added reasoning comes from liking the new CEO. It'll be interesting to see what he does, but the idea of splitting the group into three segments, budget range, middle range, upper range, would be a smart move. It would allow them to battle the discounters in the budget range, and the upper range groups in the upper price range, all the while keeping their middle range branded products largely out of harms way. In effect, the middle range is their core market, so focussing on that is the smart move. Like I wrote yesterday, they need to remember their place, which is slap bang in the middle. Also, come the final year accounts, I would not bet against him delivering some good news regards the dividend, but I'll hold off stating the odds until I firstly see the interims, and secondly hear his plans. An added short term risk is income funds selling, but I've added more, and something tells me, come the time of the interims, I'll know whether that was a smart move or not.
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50 comments
The point here being that PPE in total is valued at £24bn in the accounts at cost - my point above really that using cost for PPE is prudent.
Tesco's new tablet has just been released... http://www.engadget.com/2014/10/03/tesco-hudl2-vs-hudl/ The sooner Tesco get out of markets like this, and refocus on their core business, the better. But, I guess it's at least decent...
You have to consider from an investment perspective that the shares are now 57% below their highs of £4 and weren't excessively valued at that point.
A huge amount of bad news is priced in.
They aren't Enron and aren't going bust - the time to buy might have been yesterday.
So based on some high level calculations above looks like they might be stretching their leverage ratios. But what is your view guys on whether they will go for the rights issue?
I did some back of the envelope run through their cash flows (hopefully more reliable than EBITDA...) and although they do have large shortfall it seems to me they can just make it by cutting dividends and reducing capex.
more calculations here: http://www.valueinvestorshouse.com/does-tesco-need-rights-issue/
I guess the question is how much of the capex is committed mid to long term and is therefore not flexible. that would put them in asset disposal scenario as an alternative to the rights issue.
Any thoughts?
Yep, capex is going to collapse as their expansion plans are pulled and already have been to some extent.
Hi valueinvestorshouse -
Provided Tesco comes out of the recent investigations with a clean bill of health, I am inclined to believe that it will start an asset disposal programme. It owns Dobbies Garden Centres, a stake in Harris + Hoole coffee shops and the Giraffe restaurant chain, as well as Tesco Bank and Tesco Mobile. Not clear to me how much they would need in order to strengthen the balance sheet to a decent degree.
The worst scenario is that the investigations take months, as different regulators (plus the parliamentary select committee) are queueing up to take their turn.
They could start the asset sale tomorrow if they wanted. They are separate businesses - I very much doubt they need to resort to any of this though. All will be revealed over the next few months and a share price of £1.70 will be looked upon as a gift from the gods ;-)
I stand corrected. Thanks.
Ramridge, thanks.
Nigelpm, I'm not sure where you think my article is "way off".
There are two points. First, can you trust Tesco's numbers? The answer appears to be not completely. IFRS is strict, but as soon as you set specific rules some companies will try to find ways to get round them. At some point, the presentation becomes misleading even if you comply with the rules.
Second, in its financial statements Tesco's properties are valued at cost, but they also provide a market value, which is not in the financial statements and therefore is not covered by the auditors' report. Furthermore, I think it is highly likely that there will be significant writedowns in the property on the balance sheet. I'm not suggesting Tesco has zero value, but If you can't trust the numbers, how can you be confident what that value is? You might perhaps dismiss the odd hidden billion, if that was all, but it clearly is not.
First, can you trust Tesco's numbers? The answer appears to be not completely. IFRS is strict, but as soon as you set specific rules some companies will try to find ways to get round them. At some point, the presentation becomes misleading even if you comply with the rules.
Most companies will NOT try to get around them. It doesn't work like that in the real world.
Enron did (to bring them back in) and succeeded but it's very much the unusual rather than the norm.
Furthermore, I think it is highly likely that there will be significant writedowns in the property on the balance sheet.
Why do you think that?
You realise that IFRS compliance includes a check for impairment on PPE?
You'll also see that Tesco has historically written off amounts in the cost value here.
I'm not trying to paint a picture of a glorious world where no tries to make their results look as rosy as possible. Of course that goes on - my point is it is very much the 5-10% of the financials around the materiality level.
Nigelpm, just to be clear by "get around" I didn't mean that they necessarily break the rules, but they will structure transactions with the accounting treatment in mind. Why do you think almost all the supermarket leases are classed as operating leases (off balance sheet) rather than finance leases (on balance sheet)?
I am primarily a research analyst/investor. I originally started looking at Tesco when Phil Clarke was replaced to see whether there was value in the company. It fairly quickly became apparent there wasn't. At that point I would normally move on to the next potential investment. The only reason I wrote the research piece on my blog and a more detailed one on Seeking Alpha at the beginning of September ("Tesco: Aggressive Accounting Hides Financial Weakness") was because I thought Tesco was seriously misleading investors. This was clear before the recent announcement.
Yes, I am aware that Tesco is required to test for impairment. It is based on the company's cashflow forecasts for individual stores. This clearly gives Tesco some discretion on timing. The auditors may check the numbers, but values are based on Tesco's own projections (including estimated long-term growth of 2-5%).
The accounting issues relating to commercial income may prove to be 5-10% of profits, but if you add up all the other things going on it is a lot more than that.
By the way. Per 2014 annual report:
http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf
per page 14:
Property
The market value of our property across the Group currently exceeds
£34 billion, with the most significant driver of the reduction since last
year being the impact of foreign exchange rates.
Hi njstevenson -
Any flaws in the following?
“ For analysts at Nomura the latest 'profit warning' from Tesco puts that company's credit metrics effectively into 'junk' territory, as per a research note issued on 29 September. As regards the company's fundamentals, if one takes the better part of the firm's £250m profit warning at face value then that means its operating margins in the UK, on an EBIT basis, would come in at 2.8%. The key metric is the company's gearing they point out and, in turn from the above, they estimate that the retailer's net debt to operating earnings (adjusted EBITDAR) comes in at 3.65, whereas the threshold for 'junk' in the sector comes in at 3.5. “ (source: http://www.coutts.com/news-and-insights/newsitem/i...
We know Tesco’s current disclosed balance sheet net debt = £6.6bn (latest accounts). If we add the £2bn of off balance sheet debt, the ratio comes to
(1) Adj EBITDAR = 6.6/3.65 = 1.81bn
(2) net debt to operating earnings (adjusted EBITDAR) including off balance debt of £2bn = (6.6+2.0) / 1.81 = 4.75
If the threshold for ‘junk’ is 3.5 then we may have to invent a new word for this level.
P.s. And that's without any adjustment for the pension fund deficit of £2.6bn.
The rating agencies include the present value of minimum future lease payments and the pension deficit in their debt calculations. I wouldn't try to back out the numbers in that way as it not clear how they've arrived at their metrics.
sometimes it is not only the case of complying with the letter of IFRS (the law) but it is also about the spirit...
Hi njstevenson - Firstly congratulation on a well researched and presented piece of analysis.
The only point I wanted to make by comparing Tesco to Enron is that under immense pressure to produce results, some companies resort to dubious accounting practices and in the extreme in the case of Enron downright illegal activities. The red flags for Tesco are there to see. For the avoidance of doubt I am not saying that Tesco have resorted to illegal activities. The weight of the many regulators have rained down on them and we will soon know what else (if any) they have been up to.
Regards
The only point I wanted to make by comparing Tesco to Enron is that under immense pressure to produce results, some companies resort to dubious accounting practices and in the extreme in the case of Enron downright illegal activities. The red flags for Tesco are there to see
Red flags? where? They've chosen certain accounting treatments that are completely within IFRS.
In case you weren't aware Enron essentially made up contracts and revenue went from $12bn to $100bn in a few years.
Tesco as covered by Kantar Worldpanel have around 28% of the Grocery market that is worth c.£180bn. That's £50bn revenue just from the UK. And the majority of their revenue. It would be incredibly difficult to make this stuff up with this almost external validation going on every month.
There is no way they can come anywhere close to Enron.
Yes, some of the accounting might be a touch less prudent than it could be but it's within IFRS which is now quite stringent given the Enron/banking sector collapse.
You are talking nonsense - sorry to keep repeating myself but you are very wrong.
For the avoidance of doubt I am not saying that Tesco have resorted to illegal activities. The weight of the many regulators have rained down on them and we will soon know what else (if any) they have been up to.
Huh? I thought you were comparing Enron to Tesco - now you are stating that they haven't resorted to illegal activities. Make your mind up!
As a disclosure, I wrote the Tesco's Hidden Debt piece linked above, on which the FT Alphaville article is based. I wouldn't want to compare Tesco to Enron. The two are obviously different. But the company has presented one story to shareholders and other readers of the annual report, and another to investors in the property bonds. In the case of the former, it has clearly tried to make the transactions appear as normal sale and leasebacks. The amount of debt involved is material. Without a rights issue or asset sales, it would not surprise me if the company is downgraded to sub-investment grade.
The company also has a long history of aggressive accounting: inclusion of property profits in underlying earnings, capitalisation of interest/development costs, using the pension cash cost rather than P&L expense etc, which have all boosted short-term profits. Their treatment may comply with accounting rules or be included in a non-GAAP figure, but it does raise questions about earnings quality and what else might be hidden. Therefore, the \recent announcement is not a complete surprise. It is hard to avoid the conclusion that, up to 2011 at least, this was driven by management bonuses based on EPS growth and return on capital.
Finally, it would be unwise to rely on Tesco's own valuation of their property. This is based on notional rents that Tesco itself would be prepared to pay. Therefore the valuation is completely circular: the stores are only worth close to that value so long as Tesco stays profitable. The value has continued to go up in recent years (apart from 2014 when FX was blamed for the decline) despite the changes in the market. It is hard to believe the value now would not be materially lower than a few years ago. The properties open-market value (whether sold to other retailers or for residential development) would be much lower, almost certainly below book value.
I think it's fair to say Tesco haven't been most prudent in their accounts in this area. I'll give you that but some of your article is way off the market. As I've written above IFRS is quite tight now after Enron and banking collapses.
Remember their entire property portfolio is still valued at cost!
That will hugely outweigh the odd £bn they are "hiding" somewhere else.
"To compare Enron to Tesco illustrates that the scribbler hasn't a scooby of why Enron blew up."
Enron used off balance sheet SPVs to hide debts and losses.
Tesco are using off balance sheet vehicles as a smoke-screen to hide around £2bn of debts.
Whether one sells cans of beans and the other energy futures is beside the point. It is balance sheet financial engineering.
"reliable sources? where are they from?"
Please re-read my post. One is from the Times and the other from FT Alphaville.
This is my last post on this subject as it simply encourages bulletin board trolls to engage in personal attacks. And as valueinvestorhouse says at this moment, emotion seems to cloud people's judgement.
Ramridge (no long or short position)
Questions for you Ramridge,
What instruments were Enron trading and parking in these off balance sheet SPV's? Energy futures and ?
"Whether one sell cans of beans or energy futures is beside the point" - that's the POINT, it is not.
Your financial liability on cans of beans is minimal, on an energy future or a $100m Credit derivative contract it's massive.
The financial balance sheet engineering Tesco has engaged in is nothing compared to Enron's. Fact.
"This is my last post on this subject as it simply encourages bulletin board trolls to engage in personal attacks".
Cop out. No one is trolling you. As someone who has dealt with Enron I know for a fact their financial derivative exposures and huge leverage to credit derivatives makes Tesco's current actions comparable to a 12 years first foray in to high street banking....
Enron used off balance sheet SPVs to hide debts and losses. -
I think you'll find the revenue recognition element was just as important if not more so.
I'm afraid comparing Enron to Tesco isn't very bright but you believe what you like.
Tesco are using off balance sheet vehicles as a smoke-screen to hide around £2bn of debts
I very much doubt this but as I'm not close to the detail I'll refrain from passing judgement on it.
Please re-read my post. One is from the Times and the other from FT Alphaville.
Hence my question of reliable sources, the Times and FT Alphaville are not high on my list of knowledgeable sources.
This is my last post on this subject as it simply encourages bulletin board trolls to engage in personal attacks.
No one is trolling here. I'm afraid when I see nonsense posted I like to set the record straight.
A blogger writes;
http://discount-investing.com/2014/08/26/tescos-hidden-debt/
Gives it a very readable explanation and a rather damning conclusion;
"In my view, these transactions are clearly a form of financing, rather than genuine leasing transactions. The accounting treatment may comply with IFRS—and Tesco’s auditors, PricewaterhouseCoopers, have obviously signed off on it—but it is almost impossible to understand the substance of the transactions from Tesco’s financial statements. The fact that Tesco has gone to such trouble to ensure that the bonds are not included on its balance sheet, and the inadequate disclosure in the notes to the financial statements, is not a good sign. The lack of transparency raises serious concerns about what else remains hidden."
it's actually both - reduction in asset turnover and reduction in margins. in itself it may not be the end of the world but what i really don't like is the additional capital spend which essentially achieved nothing...
i have no clue where the share price is going because it is such an emotional play right now, but in terms of business fundamentals this is a very tough proposition.
have a look at Tesco (LON:TSCO) cash flows for the last five years - there are three very serious issues there:
- operating cash flow generation is down almost by half in the period
- at the same time there was a large capex investment well beyond the maintenance capex - that effectively implies negative returns on incremental investment (crazy!?)
- there was not enough cash after capex bonanza to cover dividends so additional financing was required
I think it's going to be a tough job turning around this business...
more on the cash flow story: http://www.valueinvestorshouse.com/a-short-story-on-tesco/
Isn't this just the factor associated with a reduction in profit before tax due to falling margins?
This table pretty much tells the tale :
http://www.tescoplc.com/index.asp?pageid=30
4,836 stores in 2010
in 2014 - 7,305 stores
Lots of capital expenditure which will almost certainly die away fast now.
These prices are getting silly IMHO.
Trouble is that can continue for the foreseeable.
To compare Enron to Tesco is beyond belief but all sorts of muppets come out of the ether at times like this.
Agreed Nigel.
To compare Enron to Tesco illustrates that the scribbler hasn't a scooby of why Enron blew up.
Not quite ready to pull the trigger myself. But its getting very close for a tuck away and forget buy. But more margin / negative sentiment to be priced in I suspect.
A tad premature it would seem Johnny.
SBRY disappoints.
Tesco subject to an Inquiry.
Tesco, Morries and Tesco continue their steep drop.
Certainly a whirlwind at the moment.
Key dates: 23rd October:Tesco, 6th Nov:Morries 12th Nov SBRY results.
Think I'll hang far until at least Tesco is out of the way...
I think it will all blow over and have taken todays lows as a buying opportunity.
Enron and Tesco completely different beasts surely?
IOne and Energy company that blew itself trading Credit Derivatives - t'other a grocer, selling food, clothing etc etc with no fancy trading arm blowing the barn doors away
"I know the share price will bottom before the news gets better..."
Eh, well, it may not get better. Think about Enron which used off balance sheet vehicles to hide large losses and debt.
But then Tesco wouldn't do that, or would they?
Tesco. What I find intriguing about this situation is why so many people are trying to call the bottom! If you manage to buy at the bottom you will be lucky and that is all. Why not wait until the share price forms some sort of base pattern and until you can feel a bit more confident about the extent of its problems.
Does anyone believe the next announcement from the company will be along the lines of "we have done a thorough investigation and the previously reported mis-statement of profits was a one-off, oh and by the way we know how to grow like-for-like sales in a profitable way again and it won't involve massive short term pain/re-organisation costs and is assured of working!"
Luckily I don't hold this but if I inherited a portfolio that held it I would sell immediately. Why hold on? My guess is for most people it is the problem of worrying that they might be selling right at the bottom.
I know the share price will bottom before the news gets better but I still think it is far too early, why try and hit the absolute bottom. If they start to get it right there will be plenty of money to be made even if you miss the bottom.
There are plenty of other fish in the sea!
Buffett may still hold a big chunk of Tesco's but he has been selling rather than buying.
http://www.theguardian.com/business/2014/mar/02/warren-buffett-sells-tesco-shares-berkshire-hathaway
That article is dated March 2014!
What intrigues me is that the sage of omaha still holds a substantial stake despite a vast paper loss. But then he might have a different agenda to us mere mortals.
Why does this intrigue you?
It's what buffet does - he buys stakes in good companies and holds for the long term.
This article in the FT quotes Buffet saying that his Tesco investment has been "a huge mistake". It would seem that he is down about £880 million on the investment.
Not entirely clear to me why he is still invested.
Of course it's been a mistake - he's lost a wad of cash on paper. Not sure what else he'd say really.
It's quite obvious why he is still holding, if he starts selling, the share price will take a further battering on two counts, one, from his shares flooding the market, and two, because Warren Buffet is selling. The latter will do more damage, and both would cause him to lose even more money.
As long as he doesn't think the company will go bust (never say never, but very very unlikely, especially if you consider that their internet business must be worth over half the current share price value, and they have a property portfolio worth 190p a share). Anyway, as long as he doesn't think the company will go bust, his best hope for recovering his investment is to hold and wait to see what happens.
But so as to be clear, the fact he is holding means only that he doesn't think the company will go bust, nothing else, nothing more. No doubt he will be hoping that the share price will stabilise enough at some point for him to properly consider his options. When that happens, he will either elect to sell, or he will hold based on whatever Dave Lewis has managed to do. If Dave Lewis can get things back on track and clear up the horrific mess left by Clarke, then he may hold, or he may not.
I remember reading a story from one of his holdings in the 90's. Can't think of it's name, but a big house hold name company he bought into tanked by over half. He was forced to hold (i.e. he knew if he sold, he'd only do more damage, and risk losing more money), later, he talked how lucky he was that he was able to recover his money a few years later, by which point, the share price had not only stabilised, but had recovered to a little over his purchase price. He sold then with a profit. I'm not saying the same will happen to Tesco -- at current, I believe long run they will recover. All I'm saying is, because of the size of his investment, and who he is, he has little choice but to hold and hope Dave Lewis can turn things around.
The release of the interims on October 23rd will make very interesting reading. Hopefully, they will bring an end to the chaos, and allow a recovery to take off. I still have a small amount in (unfortunately, purchased a few days before the misstated profit news...), on October 23rd, I will decide what to do with that stake, keep it, increase it, or sell it. I'd imagine Buffet will be doing the same.
Mike Ashley has a very good record when buying brands and incorporating them into the Sports Direct business.
His investment record appears to be less fruitful. According to this Telegraph article he lost £300 million on HBOS. It's also possible that Debenhams might be going against him as well.
The accounting problems with Tesco may be more deep rooted than currently perceived. Here are two thoughts from reliable sources:
Tesco is only one of three FTSE 100 companies still offering full defined benefit pensions to some 300,000 eligible employees. The current pension scheme shortfall is £3.2bn
Here is an extract from today’s article in the Times:
“It’s a puzzle to understand how Tesco is honouring its £170 million recovery plan promise while also chipping in enough to meet the everyday additional liabilities that come with one of the biggest workforces in Britain. It’s hard, too, to see how the trustees will not be forced to ask for much more cash from the company if they are to do a proper job of protecting members’ interests. That’s a drain on future profits that may not have been properly factored in by analysts.”
While you are chewing over this, here is the second thought.
Tesco have been using off balance sheet SIV’s for structured sale & leaseback property deals. In an article in FT Alphaville (22/9/14) the paper estimates that this represents around £2bn of debt that is not currently reflected in Tesco’s balance sheet.
Both of these issues raise question marks over substantial sums of money.
Given the lack of financial controls and governance uncovered over the past few weeks, you would have to be a very brave investor to continue to hold Tesco shares.
reliable sources?
where are they from?
I see Mike Ashley has used Sports Direct to take a £43m punt on Tesco recovering. Shows how much the fall from grace has been since the news of the misstated profit. Still, Ashley certainly has a very good investment record, so his involvement is at least positive in some way...
The stock is so far below any long term support you're in uncharted territory. I would be looking for resistance to turn into support before even considering holding this stock. It may be undersold but you don't buy a falling knife without good reason. Being too big to fail is not a good reason. Let price turn and then you can begin aiming for levels such as 230, 250 and 280.
Please excuse the tone of this message, but you're not clever for holding Tesco. You'd be clever for buying at the bottom. The attitude of holding companies because they are "too big to fail" will not lead you to long term returns. This is not how you "beat the stock market".
Have to agree UK VI,
Far too many spivs in the market these days, all pushing their drivel and outright lies. I've seen some outrageous claims in my time but Tesco going bust - highly unlikely. And the person pushing that line has zero evidence.
I've been a shareholder since 2012, so obviously I'm disappointed, but I still think the company and its shares will recover.
Holding on in situations like this can be difficult, but if each position size is small (say 2%-4% each across 30 holdings) then the trials and tribulations of any one company shouldn't be too hard to stomach.
Two useful articles on FT Alphaville - Accounting for clubcard voucher scheme and Carrefour analysis
Well, Tesco's misstated profit made for an unexpected turn of events. Stunned to say the least. A company of this stature making a mistake such as that. Staggering. The difficulty of Dave Lewis's job has been substantially increased, because now he has to restore their reputation on reporting. I still firmly believe in the long term case for Tesco, but it turns out my decision to buy on the what appeared 'kitchen sinking' was ill timed to say the least. Could see Tesco drift down to the 190p level now, if not a touch lower, unfortunately. Also, with this news, not so sure they're as take-overable at that price as they would have been previously.
Truly staggering turn of events, and the only good I can see from it is the way Dave Lewis handled it. Of the previous CEO, Phillip Clarke. He surely has to go down now as the biggest mistake in Tesco's history. Seems he totally lost control, and the sooner Lewis streamlines the business, to get its size in order, and make it more manageable, the better. If it hits 190p, bar any further news, I'll make another purchase and lower my average. Otherwise, 230p average is what I'll be sticking with for the long term.