Investment View: Tesco lost US revolution but will live to fight again

Even though it is pumping money into its UK stores, Tesco is still more profitable than both its main quoted UK rivals

Tesco

Our view Hold

Price 339.6p (+2.15p)

There was nothing easy for Tesco about the American grocery market, and its failing US operation has hung around for so long it's no longer fresh. But it seems to have taken Philip Clarke quite a while to realise Fresh & Easy, the US chain based in California, Arizona and Nevada, is past its sell-by date.

The decision to offload it, even at a loss, will buy the embattled chief executive some time in the City, which has been urging the world's third biggest retailer to cut its losses at the US chain for quite a while now.

Tim Mason, the man who was running it, will also be seeking fresh employment. Before we kick Mr Mason, it's worth remembering that he was the man in charge of the wildly successful Club Card scheme at launch and behind the famous "every little helps" slogan.

Mr Clarke is running out of turbulent priests to rid himself of at a time when he still has fires burning in other parts of the empire.

Regulatory changes in Korea will deprive the group of £100m or so annually; then there are the dowdy UK stores. My personal experience of these – as a mobility impaired consumer – speaks to the problems Tesco is having in its home market.

I was left hanging around in some discomfort while various people tried to work out what to do with me. At a Sainsbury not two miles away the smiling man on the door offered multiple mobility options, and urged me to seek him out if I needed any more help.

An isolated incident? Maybe, but isolated incidents mount up, and can spread across social media like wildfire, badly damaging brands in the process.

Then there's the growing threat from Aldi, the German discounter which is busily gobbling up market share. Discounters are going to continue to do well in austerity Britain, and it isn't yet clear that any of the British-owned supermarket groups have the answer to them.

Is Mr Clarke the right man to get Tesco motoring again or would someone else fare better? That's a question investors are going to have to start asking themselves. Tesco is too good a business to be allowed to drift for too long.

True, the group has not been finding it easy everywhere in the Far East, but there is a lot to like about its businesses in Malaysia and Thailand, and the Korean operation still makes good money. A solid presence in the world's most dynamic regions is not something any of Tesco's rivals have.

Any cash realised from a Fresh & Easy sale can be utilised to invest in that region, while helping to fuel Mr Clarke's plan to revitalise unfriendly UK stores, where his prescription – spending money on staff and training them to look after shoppers – is the right one.

On 20 January, I suggested readers might want to follow legendary US investor Warren Buffett and buy Tesco with the shares at 327p. If you did that you'll be only marginally ahead now, although there's been some dividend income to cheer things up a bit.

The stock trades on 10.4 times forecast earnings for the year to end February, a bit more than Morrison's (10 times), which has problems of its own, but significantly cheaper than the current sector star, Sainsbury. The prospective yield, at 4.6 per cent, is a little ahead of Morrison (4.4 per cent) but less than Sainsbury (5 per cent).

Even though Tesco is pumping money into its UK stores, it is still more profitable than both its main quoted UK rivals with the best forecast operating margin at 5.2 per cent.

If Tesco was firing on all cylinders its shares ought to trade at a substantial premium to those rivals. I'm not yet ready to call time on Mr Clarke, but the clock is ticking, and it will take some good news from somewhere (perhaps a successful Fresh & Easy sale, perhaps a cheery Christmas) to prevent the shares from continuing to drift.

That said, I wouldn't give up on Tesco yet. Hold.

Suggested Topics
Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
News
Russia's President Vladimir Putin gives his annual televised question-and-answer session
peopleBizarre TV claim
Arts & Entertainment
Martin Freeman as Lester Nygaard in the TV adaptation of 'Fargo'
tv
VIDEO
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Arts & Entertainment
Comedian Lenny Henry is calling for more regulation to support ethnic actors on TV
tvActor and comedian leads campaign against 'lack of diversity' in British television
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Life & Style
life
Life & Style
fashion
News
weird news
Sport
Pablo Larrazabal jumps into a pond in Kuala Lumpur to escape a swarm of hornets
videoSpain's Pablo Larrazabal's had a refreshing solution
Arts & Entertainment
Ian Anderson, the leader of British rock band Jethro Tull, (right) and British guitar player Martin Barre (left) perform on stage
musicJethro Tull frontman leads ‘prog rock’ revival
Life & Style
Father and son: Michael Williams with son Edmund
lifeAs his son’s bar mitzvah approaches, CofE-raised Michael Williams describes the unexpected joys he’s experienced in learning about his family’s other faith
Sport
Jonathan Trott will take a second break from cricket after suffering a repeat of the stress-related illness that forced him out of the Ashes tour of Australia
sport
Sport
Gareth Bale dribbled from inside his own half and finished calmly late in the final to hand Real a 2-1 win at the Mestalla in Valencia
sport
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit