Here’s what 3 banks are saying about Tesco’s latest turnaround plan
Tesco’s shares are down more than four per cent, after the supermarket chain scrapped its profit margin target and laid out plans to invest in lowering its prices, prompting analysts cuts their ratings and price targets.
Deutsche Bank cut its earning before interest and tax (EBIT) forecast of a £50m decline in the year to the end of February 2015 to a decline of around £200m. It now estimates a UK operating margin of 4.6 per cent in 2014 and 5.2 per cent in 2013. But despite the downgrade to estimates, the bank was upbeat on Tesco’s turnaround strategy. Analyst James Collins said.
Tesco effectively told us today what we already knew – that the turnaround in the UK will take longer than originally anticipated and will require more margin investment. The investment, though, is more innovative and potentially loyalty-enhancing than the straight price reset that many had called for and better exploits Tesco's structural strengths in online and Clubcard. It's not likely to yield a rapid top line response, hence we forecast short-term profit sacrifice, but it should leave Tesco well-placed medium term in multi-channel retailing.
Jefferies kept its “buy” recommendation but cut its price target from 440p to 375p:
Tesco’s update confirmed a transition to sharper base pricing and diluted promotions; a step-up in the refurbishment of larger UK stores; and a further cut in capex. We have speculatively cut our UK margin assumption to 4.7 per cent to cover the first and see free-cashflow build to around £2bn because of the latter. The multi-channel thinking is impressive, but we await further evidence on online execution before becoming excited.
Barclays maintained its target price of 340p and warned that Tesco’s new nationwide scheme allowing Clubcard holders to save money on fuel will come as a blow to rival Morrisons:
Tesco's decision to invest around £200m into fuel prices will concern Morrison, which derives almost 25 per cent of its sales from fuel. Ocado will also have taken note of Tesco's promise to reduce delivery costs for online groceries – and to abolish them completely for grocery click & collect. Following this may be costly given its own slim margins. Reducing prices on essentials and becoming more selective on promotions has the potential to help win shoppers from rivals, but especially the discounters. However, Aldi's and Lidl's trend of 20 per cent growth will not evaporate overnight.