Investors who have stood by Tesco (LSE: TSCO) must be despairingright now. It is just one blow after another. The stock is down 53% over five years and 25% over the last 12 months. The last thing investors needed was to get caught up in the latest market sell-off.If China ends up exporting yet more deflation to the West, maintaining grocery sector profit margins could be even harder.
Loyal followers have clung onto Tesco regardless, putting their faith in new boss Dave Lewis engineering a drastic turnaround. I think the best they can hope for that it willretrench into a smaller, leaner operation, by cutting costs, closing stores and shelving expansion plans. Few can reasonably expect it to recover its former dominance.
What In The World
Tesco nonethelessremains the dominant grocer with a 28.3% market share, according to latest figures from Kantar Worldpanel. That marks a 10-year low, however, downfrom 28.8%16weeks ago. Over the same period, Aldi increased sales by 18% and Lidl12.8%. That is a brutalgrowth grab, carved out of the broken hearts of big boys such as Tesco, J Sainsburyand WM Morrison Supermarkets (LSE: MRW). The only way they can fightbackis to slashtheir prices, even harderthan in the recent price war, but they remainreluctant to sacrifice their margins to do so. And even if they were, they still couldnt slash prices low enoughwithout slashing service as well, and their customers wont thank them for that either.
Nothing seems to go right for Tesco. Just a few short days ago, it was anticipating a three-way private $6b equity bidding war for its South Korean unit Homeplus. But the bids didnt emerge as anticipated, Asian markets crashed along with the Korean currency, and now Homeplus could be dumped at a reduced price.
Despite these troubles, Tesco still isnt cheap, trading at 22.7 times earnings. Buying it now can only be an act of faith, or madness. With the discounters rampant, and drastic Daves honeymoon period nearing itsend, there could be yet more trouble in store.
Investors in Morrisons have been able to console themselves with a whopping yield, now a beyond stonking 8.15%, but not for much longer. The 2015/16 dividendis set to be cut by as much as 65%, hackingnext years forecast yield back to just3.7%.
Morrisonsrecent sales fell at an even faster pace than Tescos, down 1.1% in 16 weeks, according to Kantar. Market share is now heading towards single figures at 10.8%, down from 11%. Thespring share price recovery has petered out, and the recent decision to back its M Local convenience store outlets is the sign of a company firmlyon the back foot.
Growth in its belatedly-launched online operation offers some consolation, and management is working hard to cut costs, pay down debts and invest the savings into price cuts on 1,700 items. This will be a smaller operation in future, and we can only hope that it will besleeker as well.
Earnings per share are forecast to drop another 9% next year, before rebounding sharply to20% in 2017, suggesting all is not yet lost. By the end of that year, the yield is forecast to be just 3.4%. Morrison wont be much much of an income stock by then, and it would take a rosy-eyedoptimists see it as a growth play either.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.