TESCO shares continued their downward slump yesterday, dropping a further two per cent after HSBC downgraded its stock to “underweight” and urged the supermarket to cut profit margins to win back customers.
Analysts at the bank slashed the retailer’s target price from 400p to 340p and added their voice to the swathe of brokers who have warned that the retailer is likely to deliver disappointing third quarter results tomorrow. Shares have fallen almost six per cent in the last two weeks as investors prepare for a downbeat statement.
“Cost cutting may help short term, but this is likely to result in ‘consumer unfriendly’ actions, causing further sales declines and creating even more margin pressure,” said HSBC’s David McCarthy. “Tesco moved onto this vicious spiral some time ago, and so far, all attempts to break the spiral have failed in our view.”
Last year poor Christmas trading sparked a shock profits warning, prompting chief executive Philip Clarke to embark on a £1bn UK recovery plan. Now 18 months into his turnaround Clarke – along with finance boss Laurie McIlwee – is likely to come under shareholder pressure if Tesco’s results continue to slide. HSBC said Tesco could “destroy competitor’s cash flow and profits” by cutting its margin by two to three per cent. “Tesco needs to make its offer compelling, needs to hurt its competitors and needs to rebuild. But before rebuilding comes demolition,” added McCarthy.