Retail analyst Clive Black recently described Tescos (LSE: TSCO) (NASDAQOTH: TSCDY) latest board appointments as a light beam of good news from Tesco in a sea of darkness. I understand what hes trying to say, but actually Tescos problem now is that everythings been very much exposed by the light of day information that management would certainly prefer you didnt know.
Before I go on, I should note that Tesco is still Britains largest retailer and the majority of analysts expect its stock price to rise from here. As a prudent investor, however, there are some aspects of this company that you should be aware of. At the very least they are red flags that need to be monitored.
I recently went for a shop at a Tesco Metro in central London. I ended up buying a few more items than usual. There was a big queue at the check-out so I decided to go to the self-service terminals. That choice cost me at least 5 to 10 minutes. Why? Because the space the store had provided me to place my shopping bags on wasnt big enough. Every time I made some space on the metal weight-detector for extra bags (placing earlier bags on the floor) I needed a store clerk to assist me re-start the machine. Its a small example but the micro detail in supermarkets can affect the overall customer experience and, ultimately, revenue.
The Financial Times recently revealed the supermarket had taken delivery of a new corporate jet with an estimated value of more than $50 million. Its this Fools understanding that the jet will be sold forthwith, but lets face it, the cats out of the bag in terms of another poor management decision.
The iceberg problem
The Financial Conduct Authority is investigating the companys incorrect accounts (the number crunchers were overzealous with their revenue estimates). Anyone who has spent any time as a business analyst will tell you that this isnt a simple problem, and, more importantly, its unlikely that just one person was involved. While the headline misdemeanour might be simple to explain, theres now a lot of work for middle and senior level management to restore financial credibility to Tesco. Investors are basically already aware of this shares slipped to an 11-year-low on the news.
Investors will pay
This year Tesco reported a dividend of 0.15 pence. Thats the same as last years dividend. City analysts, however, now expect a 53% drop in next years payout.
As has been widely publicised, Tesco has grabbed two very senior and experienced businessmen to join the board as non-executive directors. Theyll clock in for work on 1 November. Unfortunately, the appointments have already been criticised. Commentators have pointed out that they both lack front-line food retailing experience. Richard Cousins currently runs a catering group, while Mikael Ohlsson joins Tesco from Ikea. This is a potential problem because City analysts say if the current directors had had even some food retailing experience, they would have been more attune to or been on the look-out for the accounting irregularities that were discovered. These new appointments mean there is still no food-related retailing experience on the board.
On the plus side, both men have been hailed for their expertise in cost cutting.
Tesco now needs to do two basic things: restore management credibility; and bring back customers from the discount stores like Asda and Aldi/Lidl.
As it stands, Tesco has been clear about how it plans to do this. The first solution has been a management re-shuffle. The second is a new growth strategy. Described in the press as being all things to all men, Tesco is going to extend its tentacles out to grab consumers through more convenience stores, and lower-cost food options. Its also going to make space for the higher end of the market.
Will it work? So far the markets guessing its unlikely to do more damage. Thats a good start but any Fool can see Tesco has a long way to go. If it can go the distance, Tesco now obviously represents great value.
Now here’s a question for you: do you think slip-ups occur more in companies when management have a smaller-stake in the company? It can be easy to back a company with a high-profile name and large market position but is there accountability at the top?
Sometimes it can be worthwhile investing in smaller companies where management have an almost personal attachment to the company. That attachment can also come in the form of a financial commitment. You can be more comfortable, then, that the leaders of the company will do everything in their power to ensure the business is motoring along nicely. If this is something that appeals to you, check out the Fool’s Champion Shares PRO service: until the end of October, we’re allowing readers a FREEglimpseinto the service, and what’s more, we’re revealing four bonus share ideas. You’re under no obligation whatsoever to do anything more than read it, soclick hereto get access to this hub– but hurry, as it will only remain live for a limited time!
David Taylor 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.