What will happen to Tesco and its investors? Here's what the analysts think after the latest concerning news from the retail giant.
Tesco's terrible year became a little bit worse this morning, after the beleaguered supermarket chain revealed that its profits for the financial year ending in 2015 would not exceed £1.4bn.
This falls short of market expectations by a wide margin, since analysts had predicted profits between £1.8bn and £2.2bn for the period.
Shares in the company took a hammering following the update, falling by 16.2 per cent on the FTSE 100 to 157 pence in early morning trading – an 11-year low for the company. Shares have since risen slightly to 167 pence – an 11 per cent decline compared to yesterday.
It's not the first time this has happened – just three months ago in September, Tesco revealed it had overstated its profits by £263m, resulting in shares falling so low that billions of pounds were wiped off the value of Britain's biggest supermarket chain.
With Tesco's situation becoming worse and competition from the likes of Aldi and Lidl intensifying, what does the future have in store for Tesco? Here's what the experts think:
Mark Kimsey, senior trader at Accendo Markets, says Tesco is no longer a realistic investment option:
To echo my words of 22nd September - Tesco is no longer a viable investment. The share price has plunged 25 per cent since my last comments and unfortunately today's update suggests Tesco's circumstances will worsen before improving, and at great cost.Full-year profits are way off the City's already low expectations. A fire sale of assets is almost nailed on and a rights issue cannot be ruled out. Traders are clearing the decks of what remaining stock they had, and that of sector peers.
Mike van Dulken, head of research at Accendo Markets, thinks the profit warning is the result of short-term impacts on the road to recovery:
While it’s slogan may be ‘every little helps’, Tesco (TSCO)’s decision to take the rule-of-three a step further with another profits warning is no laughing matter or more satisfying/effective for loyal and battered shareholders.While new CEO Dave Lewis and his team may be taking all the right steps to restore confidence in the UK’s biggest grocer by market share after its accounting troubles of late and trying to keep the continually gaining cut-price competition at bay, the short-term impacts on profitability are being punished mercilessly.
Mike Dennis, food and general retail researcher at Cantor Fitzgerald, believes Tesco will make “very little, if any” profit in the UK during the second half of its financial year, including Christmas:
Management has added more staff hours and invested more in price and short term money off voucher tactics, but this implies UK grocery trading profit in the second half is negative due to lower sales on an already higher cost base.The recovery of the UK could take longer as we believe the CEO needs to simplify the business via UK and international asset sales, then reconnect with suppliers by changing payment terms and lowering his cost of goods and then start on the long road to rebuilding the Tesco brand with shoppers.