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
Click to follow
The Independent Online


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.