I recently had surgery. It was painful. It was also painful leading up to the surgery. Many aspects of my life were made to be quite difficult even running to catch a bus was a strain. Im technically cured now but it doesnt feel like it. Itll take some time to get back to normal.
Tesco (LSE: TSCO) has found itself in a similar situation. It looked weak earlier this year, then it looked even weaker by November. Are its darkest days behind it now though?
Tesco is not a pretty sight as it stands. Its got a P/E of nearly 18 times, and earnings per share of just 12 (low compared to J Sainsbury). The retailer has lost around half of its market value since the start of the year and the majority of City analysts think the stock price will stay the same or move down slightly from where it currently resides.
Tescos dividend yield has always been a drawcard for investors but even that is forecast to take a hit as a direct result of the companys recent misses.
To add insult to injury, according to The Financial Times, Tesco was again the worst performer of the big four supermarkets late this year with a drop in sales of 4.2% in the four weeks to November 9.
Naughty or nice?
We all know Tesco has been naughty this year, so no, it doesnt deserve any Christmas presents from Santa. That said, you never know how Santa will feel on the day. Maybe that 260 million misstatement will be forgotten? Thats unlikely, but it may be forgiven.
Theres already evidence to suggest that consumers are willing to spend-up big if theres a bargain to be had. In fact last week police were called to Tesco supermarkets following concerns that stores were in danger of becoming battle grounds as Black Friday customers hunted down heavy discounts. Police reported over-crowding.
Good tidings we bring
So will that demand surge happen again at Christmas time? It all depends on what Tesco has to offer. The basic dynamics, though, of the UK supermarket space havent changed. Consumers want convenience and affordable groceries. Tesco found a way back into the market on Black Friday by discounting heavily. I suspect it will need to do that again over the Christmas period in order to win customers back from Aldi and Asda.
Hope for the future
So lets say Tesco decides to market its Christmas selection, and offers big discounts again well, nothings changed, has it? We know thats not a sustainable model for the retailer it will just lose more of its profit margin. What it could do is remind customers why they used to shop at Tesco in the first place. Is that realistic?
I dont want to kid anyone, I dont believe Tesco will truly be able to find its feet again until real wages start to rise again in Britain. However there is a middle ground. That middle ground could be found with Tescos new management team. According to recent media reports, Tesco has decided to part company with Chris Bush, managing director of the UK business, as well as at least three senior executives already suspended following the revelations of the accounting errors.
Its this Fools opinion that former boss, Philip Clarke, had been in the job too long. Hes gone now, and as hard as it is, it seems Dave Lewis is doing everything he can to improve the business including restructuring team he has around him. Supermarkets succeed and fail on management decisions, so if Tescos new management can bring in the crowds at Christmas, and then find a way of keeping them (through unique product offerings at competitive prices), it may be able to set up a reasonably solid financial base for a time when consumers are more happy to part with their money.
If Tesco isnt able to hold customers over the Christmas period, I suspect its share price will continue to slide. After a difficult year, I think this is one of the more important Christmas periods in the retailers history.
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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.