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Oliver Haill Sharecast News
22 Oct, 2014 16:35 23 Oct, 2014 19:58

Tesco results live: comment, reaction and analysis

Welcome to our rolling coverage of Tesco's results this morning, with comment and analysis from City and retail experts:

FTSE 100

8,060.61

15:45 15/11/24
n/a
n/a

Tesco

345.50p

15:45 15/11/24
1.05%
3.60p

1958: Here's a round-up of some of the broker analysis today.

1734: Fitch Ratings has downgraded Tesco's credit rating from BBB to BBB-, citing negative outlook and challenging operating environment as the main reasons behind the move. "The downgrade reflects Tesco's continued loss of competitiveness its core UK operations, with profitability further impacted by the accounting adjustments associated with the group's recognition of commercial income," Fitch said in a note. "Fitch expects further pressures on volumes and pricing, coupled with the significant operational leverage inherent in the business, leading to a structural reset of margins in the UK business."

1723: Moody's has downgraded Tesco's credit rating by a notch to Baa3. "We have downgraded Tesco's ratings because of the materially reduced trading profit for the first half of fiscal 2015 that is affected by the rapid structural changes in the UK retail grocery market as well as the ongoing uncertainties related to the investigation by the FCA into Tesco's accounting irregularities," Moody's said in a note.

1530: Accountants at Moore Stephens have put out a note about Tesco's overstatement of profits, noting that its research had found that the top ten supermarkets owe suppliers approximately £15bn in supplier debt at any one time. Tesco's rivals Sainsbury's, Waitrose, Asda and Morrisons all responded to reporters that they were confident in the accuracy of their accounting.

1350: Providing a City view on the management presentation, veteran independent retail analyst Nick Bubb said he could well see why the market took such a gloomy view of it, with the shares falling further since Lewis and co finished speaking. "They spent nearly 2 hours saying next to nothing, but they did rule out a rights issue for the time being, with all the focus on disposals to prop up the over-leveraged balance sheet. Sounds like a lot of pain is still to come on asset write-downs, notwithstanding the chunky H1 write-offs, as well as some hefty overhead cuts."

1241: Bookies William Hill and Paddy Power both have former Asda boss Archie Norman as the favourite to take over as chairman at Tesco when Sir Richard Broadbent steps down, as he announced today. Norman is on odds currently at 3/1 with William Hill to take the role, with Kingfisher's outgoing CEO Sir Ian Cheshire at 4/1, existing non-executive John Gildersleeve at 5/1 and even current major shareholder Mike Ashley of Sports Direct and Newcastle FC fame at 7's. Allan Leighton, former CEO of Asda and former non-executive chairman of the Royal Mail, is also at fairly short odds with both bookmakers. Hill's spokesman Graham Sharpe says: "Tesco’s catch-phrase is ‘every little helps’, and it seems they need every bit of help they can get at the moment."

1215: Some analyst comment on the numbers, before the presentation. Deutsche Bank says: "Tesco’s H1 profit is technically a beat vs. our forecast, 10% on EBIT and 7% on underlying PBT. However, it is clear that the commercial income overstatement will affect H2 profits and management state that 'full year profitability could...be impacted by actions to we choose to take'. We lower our sum-of-the-parts based price target by 20% to 180p, reflecting both lower EBIT forecasts and higher debt and pension deficit," writes analyst Niamh McSherry.

Barclays reiterated its 205p price target and 'equal weight' recommendation. "Tesco’s interim results have positively surprised us to the extent that its accounting issues have been fully quantified – even if a full explanation must wait. This news therefore eliminates the worst-case scenarios," writes the food retail analyst team. "Given that Tesco is focused on the need to ‘do the right thing for customers’ – plus the challenging market backdrop and competitor activity – we expect to see a clear margin impact in H2. We previously forecast a clear step down in UK margin next year, now we bring this forward to 2H." Barclays cuts its trading profit estimates 14% for the current financial year and circa 8-9% for the following two.

1150: Some reaction on Twitter:

1110: Although many in the retail profession were impressed, the reaction in the City was less warm to CEO Dave Lewis' presentation. Financial commentator Louise Cooper was more than lukewarm. "Dave Lewis showed his marketing colours, as I feared" she wrote on her Coopercity blog. "Pricing came well down on his list of what needs to be changed. He did admit pricing was 'under review' but warned 'I need to be very careful on pricing'. However he only got to pricing about 45mins through the presentation. And then, worryingly, he spent as much time talking about signage in stores as he did on pricing (maximum of one minute)."

Cooper bemoaned the fact that "trading margins are not large enough to cut prices much from here without dropping into losses. Hence the need for radical cost cutting to give him this room to move."

1101: Tesco CEO Dave Lewis wraps up the analyst briefing to typical British silence, no US-style rounds of applause here. Here's our earlier story on Tesco's results.

1056: "The Lewis family" is competitively tasting the range of food, the CEO says, hailing the great Tesco Finest range of wine. Then some fighting talk on the Rise Of The Discounters, when asked whether Aldi and Lidl's takeover of the UK grocery market was "inevitable" as one analyst asked; Lewis saying he "grew up in a market where discounters were 13%-15% of the market... before people like Tesco competed in a different way... I don't take anything as inevitable."

1047: Lewis says he would not object to a sale of Dunnhumby, Tesco's data analytics unit behind the Clubcard, on principal. "Everything is in review," he says, stressing he's not ruling anything out or anything in.

1040: On the investigation by the financial regulator, CFO Alan Stewart says the company accepts the figure it has put out today - £263m compared to the £250m originally reported. "As of now, I don't know where the FCA is going to go." Also he is grilled on the company's BBB credit rating and how committed he is to taking it back to investment grade. He suggests getting the business back in "the right shape for the future" is more of a priority than the credit rating in and of itself, as much as he understands the importance of the rating, but says until the strategic review is complete "it is still very early in the process [to make a commitment]". He says he will work with rating agencies to make sure they understand where the company is at financially. "I understand that the rating can influence the price of the company on the market... Ultimately are we good for the money? Yes we are." I think we need to get the leverage right. The capital structure is something he's very much focused upon.

1012: At the Tesco analyst webcast, management are now taking questions. First one includes the full year dividend. Lewis says "We'll make a decision on the final dividend when we get to the end of the year." Earlier, Shore Capital analysts said that, with the 75% cut to the interim dividend to 1.16p and management warnings of further headwinds and prioritisation of the customer, they expect a similar cut to the full year dividend too. Here's our earlier story on Tesco's results.

1010: Comment from IG's Will Hedden on valuation: "The supermarket is now trading close to its book value, a point highlighted by some analysts that means it could still have further to fall. Its two listed UK peers Sainsbury’s and Morrisons (both lower by 2.5% in sympathy) both trade below the value of their assets."

1004: "We are not working on a rights issue," says Lewis. Adding "never say never" but says management are not looking at it currently. To shore up the balance sheet disposals are the main focus.

1002: Looking at costs, Lewis says the time he spends on the train into London, planning his time, save enough cost to put a colleague into store for a day. Looking at inefficiency he points out that Tesco has an incredible 32 head offices in the UK which "might not be the best model." This offers "opportunities to release value" to help the balance sheet.

0950: City Index clients are net buyers of Tesco (as of this time). "Of all Tesco traders via Connect as at time of writing, 92% have bought Tesco shares, highlighting that traders are attempting to buy the dip. This could be a lucrative but highly risky strategy given the current price volatility. It’s important to state that whilst 92% are buyers, there is no indication on how long term their positions are aimed at, so do be careful," writes Josh Raymond, chief market strategist.

0945: Back to Dave Lewis. He says with the product range expanded 31% in the last 12-18 months there has been too much pressure on store staff. He announces 2m more store colleague hours between now and the end of the year and says he wants even more. The range will not be reduced until after Christmas, but the 1,000 most in-demand lines will have increased space in store.

0935: Stewart shares a slide on how like-for-likes were hit by the impact of discounters and reduced, targeted promotions in-store. He later turns to debt and admits leverage is "too high" with too much debt and fixed payments.

0930: CFO Stewart says the accounts are not pretty. "It's not a pretty picture... but it's a reflection of where we are and is a base from where we can build."

0921: CFO Alan Stewart given the mic to explain the first half accounts.

0918: Lewis stresses that the change in strategy will be felt first by customers, not the city. Investors should not expect things to be uncovered until after customers have first seen it.

0913: Chief executive Dave Lewis takes the mic. He emphasises the amazing worldwide reach of the company, serving 66 people every single second. "I can change the business around that but that engagement, that reach, is unparalleled."

0909: Chairman Richard Broadbent, speaking on a live webcast, says the company cannot provide any more detail on the accounting black hole due to the ongoing regulatory investigation. To catch up on the main numbers in the results, here's our earlier story.

0842: After Tesco's record 92% decline in pre-tax profits, James Abbott, a trader at Accendo Markets, said the fall in organic British sales was "the worst performance in 40 years" and does not sit well with traders across the city. The shares being down 5.36% to 173.20p at pixel point is evidence enough. Abott noted the public dumping of shares by Blackrock and Warren Buffett and a further £13m on top of the £250m accounting black hole sees the shares back around multi-year lows. "Why would anyone take a risk on a company that continues to disappoint in this manner? Fortune often favours the brave, but the stupid?"

0827: With Tesco management not in a position to offer full year profit guidance due to a need to create headroom for the future and stressing the "do the right thing for customers", Shore Capital analyst Clive Black and his unsung sidekick Darren Shirley see "a further risk of earnings downgrades". With the previously announced 75% cut to the interim dividend to 1.16p and warnings of further headwinds and prioritisation of the customer, Black and Shirley expectat a similar cut to the full year dividend too.

They add: "We are surprised that capital expenditure is set to remain at £2.1bn. We had felt that this is a variable that could and needs to be managed down more aggressively; no doubt this will come up in analysts' questions as will the cost base and future dividend policy." Tesco shares are down 5.05 to 173.85p.

0807: Retail experts at research house Kantar say there are "no great surprises" in the results but there are "a few tantalising glimpses of silver lining". Bryan Roberts, director of retail insights at Kantar Retail, notes that the group faces an "extremely challenged" UK business, an Irish business "in freefall" and a "patchy" performance from Europe and Asia.

On those silver linings Roberts says: "A strong position in online and convenience remain Tesco’s structural strength in the UK and the turnaround in select Eastern European markets appears to be on track. Many unknowns, understandable given the short duration of Dave Lewis’ tenure, remain. There will inevitably be some spin-offs and disposals to restore focus and generate funds and we also await some guidance in early 2015 on what the strategy will be to reinvigorate the UK business. Arguably, the only way is up."The shares are now strengthening, down 3.55% at 176.5.

0803: Tesco shares open lower. Down 5.7% to 172.63p after 3 mins.

0749: Retail analyst Nick Bubb says, apart from the news that chairman Richard Broadbent is stepping down, the most interesting aspect of the much-awaited Tesco interims today is that of the £263m profit overstatement, only £118m relates to first half trading profit. "It is also interesting that Tesco feel unable to give any guidance on full-year profits, given all the uncertainties, and that there is hardly anything about the new strategy for the UK, apart from meaningless words about 'competiveness' and 'reviewing all strategic options'.

Bubb adds: "Apart from the well-publicised profit margin accounting problem and associated management problems, the big issue is why UK sales are falling so much and it will be most interesting to hear what the embattled new CEO Dave Lewis has to say today about the structural challenge of Tesco’s over-exposure to hypermarkets, eg why didn't Phil Clarke's “Tesco Extra” revamp programme work, will the balance sheet valuation of the store properties need to be written down and are store closures planned?" A conference call at 9am will provide more detail.

0740: The FTSE 100 company's pension deficit increased from £2.6bn to £3.4bn. Net debt increased by £0.5bn year-on-year to £7.5bn.

0735: Due to the investigation into the profit overstatement, former chief executive Philip Clarke and finance director Laurie McIlwee will have pay withheld until FCA investigation is complete.

0731: Positive news for the group was that total UK online sales were up 11% and there was like-for-like sales growth of 0.8% in UK convenience stores.

0720: Analyst Brenda Kelly at IG says: "We were expecting the stock will open down at least 3%, but now it has been called up 3% in pre market." She adds that while the share price was off its lows it looks like the bounce was of the dead cat variety. And adds: "All told, we won't be expecting too much interest from investors despite the fact that the company shares have shed around 50% this year."

0719: Here's an interview Dave Lewis speaking about the results to Jody Hodges, group project planning director at Tesco.

0718: Underlying diluted earnings per share in the first half were down 48.2% to 7.71p due to the reduction in underlying profitability and a "more normal" rate of group tax.

0717: The impact of the profit overstatement, the 'black hole' in its accounts, has been confirmed as £263m, slightly more than the £250m originally reported. Tesco indicated that the problems predated this period as only around £118m of the profit overstatement was from this financial year, with £70m relating to the 2013/14 period and £75m to “pre-2013/14”.

0710: Chairman Sir Richard Broadbent has announced his own succession process. Once the current transition to trading under the new executive management he said it would mark "the beginning of a new phase for the company and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time", saying this would help the company to "draw a line under the past as it enters the next phase of its development".

0706: Chief executive Dave Lewis said: “Our business is operating in challenging times. Trading conditions are tough and our underlying profitability is under pressure." Providing little detail on his plans for the company in the results statement, Lewis did add that his personal review of the whole business was continuing but three immediate priorities were already clear: "to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand."

0704: First half trading profits for Tesco fell 39.4% at constant exchange rates to £937m, well above consensus analyst forecasts of £853m. Management did not provide a full year profit forecast. Tesco UK like-for-like sales were down 4.6%. The impact of the profit overstatement, the 'black hole' in its accounts, has been confirmed as £263m, slightly more than the £250m originally reported.

-- Thursday 23 October 2014 --

Preview: Deutsche Bank has penciled in earnings before interest and tax of £854m at Tesco for its first half, which would equate to a 46% drop on last year.

Any comments on trading since the half-year stage will also be closely watched after Kantar Worldpanel said this week that Tesco "may be turning a corner" and that sales trends were going "in the right direction".

Nevertheless, the focus will be on the extent of the company's recent profit "mis-guidance" and to what extent, if any, it will have to revise results for prior periods. Traders will also be focusing on any changes to the company's strategy, although no major modifications are expected just yet, analysts at Deutsche Bank wrote to clients on Wednesday. Overnight the FT reported the company is studying the possibility of naming a new chairman.

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