Will Tescos investment focus pay off?

Will Tesco's investment focus pay off?

The disappointing third-quarter top-line performance reported this morning (4 December) by Tesco has left analysts divided over the group's strategy. Tesco has cut capital expenditure on new stores and is instead investing in refurbishments and multichannel growth. Management has insisted the strategy will simply take time to deliver results. But, with the clock ticking, another set of weak numbers has raised questions over whether Tesco's investment focus will pay off. Here is the view from the City.

Bruno Monteyne and Richard Clarke, Bernstein Research

"Tesco's commentary again places the reason for the poor performance on a 'weaker grocery market' and 'continuing pressure on UK household finance'. They also state that the actions to reposition the business for the future (i.e. to transform the general merchandise section), are applying a short-term drag to sales. It is our view the deterioration is not simply caused by the transformation having a short-term drag on sales, but this is symptomatic of the turn-around not working. After 18 months of the plan A not working, we think the management team should consider its alternatives... We find Tesco's new strategy to move towards being a quality retailer unconvincing; moving the company in the wrong direction away from its corporate DNA. This transformation involves risky and expensive refits and a number of distracting initiatives which do not help the local management teams focus on the core problems."

Shore Capital analysts Clive Black and Darren Shirley

"Tesco UK's trade, in what is a surprisingly and worryingly weak British grocery market through the autumn, causes us concern and pressurises our positive stance on the group's shares. That stance is predicated upon the expectation the business is changing its strategy to improve the performance of its existing assets, which we welcome, and so generate free cash to shareholder benefit. In addition, the group is seeking to develop its digital and online capabilities ... We are a good six to nine month behind the expectations that we set out in our five-year free cash flow thesis... Whilst testing for both Tesco shareholders and ourselves we still support the strategy, encourage management to keep focused upon improving the performance of its existing store estate whilst constraining capital expenditure on new stores and building out its online and digital capability."

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers

"Whilst most of the hype surrounding Tesco's eventual decline is unjustified, there is nonetheless much for the company to work on. Competition from both ends of the price range remains intense, the general economic environment has not yet stabilised and certain pockets within its international markets are under constant attack. Even so, progress is being made, with the refurbishment programme already reaping the rewards of a sales uplift. Furthermore, the previously announced strategic joint venture in China should be a longer-term boon whilst, from an investment perspective, the dividend yield of 4.3% should not be overlooked. The share price has struggled to keep pace with the wider market, having risen 6% over the last year as compared to an 11% hike for the FTSE100. The divergence of views amongst analysts on Tesco's prospects is striking and reflective of varying levels of belief. Overall, with the turnaround story still a work in progress, the consensus has weakened of late to the shares coming in at a hold, albeit a strong one."

Kepler Cheuvreux analyst Fabienne Caron

"Expectations were already low ahead of the release with poor UK and noreal improvement abroad. As a whole, we believe the company has too many challenges on its plate. With -1.5% LFL ex petrol in the UK, the performance is poor... The positive impact of the 'building a better Tesco' programme remains to be seen. While South Korea continues to suffer from the restriction in store opening hours, Thailand remains a concern. Besides the external factors (Macro and street demonstrations), there are clearly some company specific issues like price positioning which need to be addressed. In Europe, while LFL in Poland were better (-0.7%) following priceinvestment, Ireland (where Tesco faces increased competition from Lidl) has deteriorated with -8.1%."

Conlumino

"As widely predicted, Tesco has recorded another quarter of slowing growth. Chief executive Phil Clarke has pointed the finger at the slowing grocery market, as well as the disruption caused by Tesco's attempts to overhaul its strategy, but there is no doubt the scrutiny over his own performance is now likely to further intensify.... Others have coped with this better than Tesco. Smaller, more agile players, such as Aldi at one end of the spectrum and Waitrose at the other, have more compelling offers that have resonated with consumers. Sainsbury too has been consistently better at hitting the right notes. This doesn't mean it's all doom and gloom at Britain's biggest retailer and it has plenty of resources to invest in improving. Some of this is focussed on making it a better place to shop, with product ranges, such as Finest, relaunched, and over 1.8m sq ft of store space refreshed and improved. However, the main thrust is on making it easier for consumers to shop."

Bruno Monteyne and Richard Clarke, Bernstein Research

"Tesco's commentary again places the reason for the poor performance on a 'weaker grocery market' and 'continuing pressure on UK household finance'. They also state that the actions to reposition the business for the future (i.e. to transform the general merchandise section), are applying a short-term drag to sales. It is our view the deterioration is not simply caused by the transformation having a short-term drag on sales, but this is symptomatic of the turn-around not working. After 18 months of the plan A not working, we think the management team should consider its alternatives... We find Tesco's new strategy to move towards being a quality retailer unconvincing; moving the company in the wrong direction away from its corporate DNA. This transformation involves risky and expensive refits and a number of distracting initiatives which do not help the local management teams focus on the core problems."

Shore Capital analysts Clive Black and Darren Shirley

"Tesco UK's trade, in what is a surprisingly and worryingly weak British grocery market through the autumn, causes us concern and pressurises our positive stance on the group's shares. That stance is predicated upon the expectation the business is changing its strategy to improve the performance of its existing assets, which we welcome, and so generate free cash to shareholder benefit. In addition, the group is seeking to develop its digital and online capabilities ... We are a good six to nine month behind the expectations that we set out in our five-year free cash flow thesis... Whilst testing for both Tesco shareholders and ourselves we still support the strategy, encourage management to keep focused upon improving the performance of its existing store estate whilst constraining capital expenditure on new stores and building out its online and digital capability."

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers

"Whilst most of the hype surrounding Tesco's eventual decline is unjustified, there is nonetheless much for the company to work on. Competition from both ends of the price range remains intense, the general economic environment has not yet stabilised and certain pockets within its international markets are under constant attack. Even so, progress is being made, with the refurbishment programme already reaping the rewards of a sales uplift. Furthermore, the previously announced strategic joint venture in China should be a longer-term boon whilst, from an investment perspective, the dividend yield of 4.3% should not be overlooked. The share price has struggled to keep pace with the wider market, having risen 6% over the last year as compared to an 11% hike for the FTSE100. The divergence of views amongst analysts on Tesco's prospects is striking and reflective of varying levels of belief. Overall, with the turnaround story still a work in progress, the consensus has weakened of late to the shares coming in at a hold, albeit a strong one."

Kepler Cheuvreux analyst Fabienne Caron

"Expectations were already low ahead of the release with poor UK and noreal improvement abroad. As a whole, we believe the company has too many challenges on its plate. With -1.5% LFL ex petrol in the UK, the performance is poor... The positive impact of the 'building a better Tesco' programme remains to be seen. While South Korea continues to suffer from the restriction in store opening hours, Thailand remains a concern. Besides the external factors (Macro and street demonstrations), there are clearly some company specific issues like price positioning which need to be addressed. In Europe, while LFL in Poland were better (-0.7%) following priceinvestment, Ireland (where Tesco faces increased competition from Lidl) has deteriorated with -8.1%."

Conlumino

"As widely predicted, Tesco has recorded another quarter of slowing growth. Chief executive Phil Clarke has pointed the finger at the slowing grocery market, as well as the disruption caused by Tesco's attempts to overhaul its strategy, but there is no doubt the scrutiny over his own performance is now likely to further intensify.... Others have coped with this better than Tesco. Smaller, more agile players, such as Aldi at one end of the spectrum and Waitrose at the other, have more compelling offers that have resonated with consumers. Sainsbury too has been consistently better at hitting the right notes. This doesn't mean it's all doom and gloom at Britain's biggest retailer and it has plenty of resources to invest in improving. Some of this is focussed on making it a better place to shop, with product ranges, such as Finest, relaunched, and over 1.8m sq ft of store space refreshed and improved. However, the main thrust is on making it easier for consumers to shop."