Credit Suisse cuts Tesco target price on big-box sales drop

Calculating that Tesco's sales performance at larger stores is likely to be worse than reported and that margins should be "permanently rebased lower", Credit Suisse has cut its earnings estimates and its target price on the supermarket group.

Credit Suisse cut its TP to 115p from 135p but kept its 'underperform' rating.

Analysis by the Swiss bank has indicated that its Tesco's larger stores, which represent not far off half its UK grocery space, generated like-for-like sales 2.3% lower in the 2016 financial year, with the cumbersome 'big box' stores create a "structural EBIT headwind" of -1.7%.

Tesco's real estate burden "appears unique and intractable" as efforts to buy back leases and other property deals eases off after the £1.7bn made so far, while real estate flexibility is further limited by £3.6bn of structured debt transactions over 106 stores that average around 70,000 sq ft.

Further deep scrutiny of the supermarket group by analysts reveals "no obvious path back to historical margin levels - or what 'normal' margins should be".

As a result, the UK terminal margin is cut to 2.2% from 2.8%, which in itself assumes Tesco can mitigate 50% of the structural drag of its large stores.

After cutting UK and Ireland EBIT estimates by 14% and 29% for 2018 and 2019 respectively, group operating profit estimates respectively fall by 8% and 17.8%, which leads to the reduced target price based on a discounted cashflow model.