Tescos(LSE: TSCO) recovery could be stalling. Indeed, after a good start to the year, theres been little in the way of good news released by the company during the past six months.
According to data research firm Kantar Worldpanel, Tescos sales are still falling. Managements plan to sell off non-core assets seems to be falling apart, and Tescos share price has fallen back to the lows printed at the end of last year. During the past sixmonths,Tescos shares have fallen 29%, underperforming the wider FTSE 100 by 15.7% excluding dividends.
Asset sales stalling
Part of Tescos plan to rebuild its balance sheet and return togrowth is to sell off non-core assets. Assets on the chopping block includedits Homeplus Korean unit,central and eastern European operations and data analysis business, Dunnhumby.
Homeplus has already been sold for a consideration of more than 4bn, but Tesco is pulling the sale ofDunnhumby. Analysts had expected the sale ofDunnhumby to bring in up to 2bn for the company.
So, it now looks as ifDunnhumby will remain part of the Tesco empire for the time being. However,Tescos central and eastern European operations, which are also up for sale, have been valued at nearly 2bn. These operations contribute almost 6.5bn of group sales.
If the company manages to offload its European operations, it should reduce group debt andequivalents from 20.5bn to 15.5bn, ten times new CEO Dave Lewiss 1.4bn profit target for this year.
Sales under pressure
Moving on from balance sheet concerns, Tescos sales are still under pressure as the discounters continue to eat away at the retailers market share.
According to the latest figures from Kantar Worldpanel, Tescos market share is at its lowest level for almost a decade. During the12 weeks to 13 September, group sales declined by 1% year-on-year.
That said, sales atTescos Express convenience stores actually grew during the period studied, although the growth was not enough to offset declines across therest of its store portfolio.
As Tescos sales continue to decline, City analysts are revisingdowntheir estimates for the companys earnings almost every day. For example, this time last year analysts expected the company to report earnings per share of 19p for full-year 2016.
Now, the latest figures from the City suggest that Tesco will report earnings per share of 7p for 2016. Further, during October of last year, analysts were expecting Tesco to report earnings per share of 20p for full-year 2017. Estimates have since fallen by around 50% to 11p per share.
Based on these figures Tesco is trading at a forward P/E of 24, a high multiple more suited to a high-growth tech company rather than a struggling retailer. City figures suggest Tesco is trading at a 2017 P/E of 15.1.
The bottom line
After a great start to the year, it now looks likeTesco’s recovery is beginning to lose traction. And if you’ve run out of patience with the UK’s largest retailer,our analysts here at The Motley Fool believe they’ve discovered a company that will make an excellent replacement for Tesco in your portfolio.
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