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Your Money > Investing Comment Articles > Tesco: Check it out
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By Richard Hunter, Hargreaves Lansdown
When Jack Cohen began trading ninety years ago in the East End of London – turning £4 of sales into a £1 profit – he could not have dreamt that his new company would evolve into a multinational with a current market worth of around £31 billion.
Five years later in 1924, and according to the company's website, “ The first own-brand product sold by Jack was Tesco Tea – before the company was called Tesco. The name comes from the initials of TE Stockwell, who was a partner in the firm of tea suppliers, and CO from Jack's surname.”
The company now has 2000 stores around the globe and generates annual sales in excess of £50 billion. Even though the majority of its business is still conducted in the UK , it has other burgeoning operations in Asia and Europe , and is currently attempting the acid test market of the US .
The group recently released half year results which showed that overall group sales grew by a further 8%, with underlying profit up 9% to £1.5 billion. Underneath these figures, the pre-tax profit line was rather more anaemic, up 1.5%, due largely to higher financing costs (the group's net debt has near doubled over the last few years) and the integration of two recent acquisitions – Homeover in Korea and the remaining stake of Tesco Personal Finance from the Royal Bank of Scotland – now to be named Tesco Bank.
Meanwhile, Asia continued to lead the sales drive, rising some 27% over the period, whilst there were also notable contributions from the online division (sales up 11%) and non food sales in the UK (up 5%). Furthermore, management's confidence for the outlook – the Chief Executive Sir Terry Leahy said that the company was “well-placed for the global recovery” – was underlined by a 9% increase in the half-year dividend payment, at a time when many other companies are choosing either to reduce or remove the dividend entirely.
Despite these numbers, the initial share price reaction to the results was less than inspired. By definition, Tesco comes with high expectations and the numbers seemed to have resulted in something of a hung jury.
Whilst the well flagged strategy of expanding overseas is intended to offset an increasingly saturated UK marketplace, this comes at a cost. The net debt situation is a concern (although debt reduction remains on track) whilst the UK marketplace is particularly fierce in terms of pricing and therefore pressure on margins. Indeed, over recent quarters like-for-like sales growth has generally been superior for the group's rivals as they have continued aggressively to play the value card, given the wider economic difficulties. Furthermore, Tesco's near omnipresence in the UK means that worries persist around ongoing planning permission.
On the other hand, there are signs of success in some of the company's newer markets, whilst in the UK the Discount Brands and Clubcard investments are beginning to bear fruit.
On a wider basis, the shares have suffered from their defensive qualities as the market has looked for early cyclical plays. The shares are down 6% over the last year, during which time the FTSE100 has put on 9%. More recently the picture has been brighter, with a 12% gain in the last three months.
In addition, only time will tell as to the benefits which the foray into the US and the banking operation in the UK may bring, with the market currently pricing in little success in either venture.
Yet, with some of the expansionary costs beginning to fade and with a stronger second half expected – and the shares looking relatively cheap in comparison to many of its peers - the longer term picture remains intact and, on balance, the general market view remains that the shares are a buy. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
