Tesco’s credit rating downgraded by S&P amid profit fears
Tesco suffered a fresh blow yesterday after Standard and Poor’s (S&P) downgraded the troubled supermarket’s credit rating over concerns of rising competition in its home market and its recent profit warning.
S&P said it had cut its long-term rating on Tesco to “BBB” from “BBB+”, but reiterated its “A-2” short-term corporate credit rating on the group.
“The downgrade reflects our view that Tesco’s profitability will continue to weaken because market competition in the UK will remain persistently high, and even intensify, over the next 12 months,” the credit ratings agency said.
“In our view, Tesco’s efforts to improve its operating performance in its home market and in its international operations have not been successful at combating the structural and enduring changes to the competitive landscape and consumer behaviour,” it continued.
The downgrade comes after Tesco issued a fresh profit warning last month alongside news that chief executive Philip Clarke’s would be stepping down in October.
The retailer said that sales and trading profits in the first half of the year would be “somewhat below expectations” due to tough trading conditions and investments being made by the supermarket to lure shoppers back into their stores.
Tesco and its peers Asda and Morrisons have been slashing prices of everyday products to compete with the discounters Aldi and Lidl.
But it is feared that the supermarket chain will take more drastic action under its incoming chief executive Dave Lewis, sparking a full-scale price war.
Analysts predict that dividends at rivals Morrisons and Sainsbury’s will also come under pressure as they follow Tesco’s lead and invest in cutting prices further. “We expect Tesco to cut UK profits, dividends and capital expenditure by around 50 per cent,” HSBC analyst David Mccarthy said in a note this week.
“These cuts look extreme but we suspect Tesco is in worse shape than first appears. New management have one shot, in our view, to avoid further downgrades, which will be down to them,” he said.
S&P said that despite pressure on Tesco, its adjusted earnings margin was still higher than its peers and that it still viewed its competitive position as “strong” thanks to its leading market share and its international reach.
Fitch also downgraded Tesco from “BBB+” to “BBB” while Moody’s cut its rating from “Baa1” to “Baa2” in June.