Tesco (LON:TSCO, Financial) is the British international retailer in many countries such as the UK, China, the Czech Republic, Hungary, India, Japan, Thailand, the U.S., etc. It also provides retail banking and insurance services through its Tesco Bank. Just several days ago, Tesco reported Christmas sales had missed the estimates. The group sales in the six weeks to Jan. 7, 2012, increased by 5.2% including petrol and by 4% excluding petrol, but like-for-like growth in the Christmas period excluding VAT and petrol decreased by 2.3% and third quarter like-for-like decreased by 0.9%. The results were below expectations and quite disappointing, especially in the context of the difficult weather conditions in 2010. In the press release, Philip Clarke, the CEO noted: “In the challenging economic environment, we made good progress internationally but despite record sales, we are disappointed with our seasonal trading performance in the UK.”
Tesco had introduced a major price-cutting initiative called “Big Price Drop” in the summer with an attempt to revive sales levels in the consumer slowdown in shopping. Nevertheless, as always, the £500 million price-cutting campaign triggered price wars. Competitors responded aggressively with price discounts and coupon offerings.
The program was helpful in terms of delivering additional volume, but it couldn’t offset the hit in Tesco's margin. The consumers drawn in had not been enough to offset the lower prices. But the CEO believed that the investments in the chain’s stores would deliver more value in the future. “We delivered a very good Christmas shopping experience for our customers but in a highly promotional market, the volume response to our increased investment into lowering prices did not offset the deflation it has driven," he added. "The wider improvements in the shopping trip that are an integral part of strengthening our performance are still to work through fully."
In terms of the outlook, Clarke gave the warning profit outlook on Tesco performance in this weak consumer shopping environment, indicating the expectation of low growth profit for the year: “In a challenging consumer environment at home, and with early signs of more cautious behavior emerging elsewhere, we have seen more strain than anticipated on our profitability during the important seasonal trading period. As a result, while underlying profit before tax and earnings per share for 2011/12 will be broadly in line with market consensus forecasts, we expect Group trading profit growth to be around the low end of the current consensus range. Our plan for 2012/13 now reflects substantially increased investment to deliver an even better shopping trip for customers – particularly in the UK. Consequently, we anticipate minimal Group trading profit growth for the year.”
Right after that, the market reacted very strongly in its stock price. Tesco immediately lost 16% of its market value, and it lost more than 22% when the stock price dragged down from ÂŁ411 per share to only a little more than ÂŁ320 per share, wiping out more than ÂŁ7.2 billion in just two weeks.
Now Warren Buffett with the recent shot-down in its price, our legendary investor Warren Buffett had increased his stake in Tesco from 3.21% to 5.08%, following the January 13 regulatory filling. Warren Buffett began to buy Tesco since 2006, and he gradually increased his holdings. Just more than half a year ago, Buffett shared his views on the company’s struggle to establish itself into the world’s largest grocery market. He mentioned that Tesco should take a hard look at its U.S. Fresh and Easy chain, “which I am sure they are doing.” Warren Buffett and Charlie Munger joked that Fresh and Easy should be renamed “Fresh and Hard.”
With the current price, Tesco is valued quite cheaply compared to its historical valuation. The market is valuing Tesco at P/E 9.7x, 1.6x book value and only 4.8x cash flow, whereas the five-year average stays at 15.4x P/E, 2.6x books and 6.2x cash flow. With the recent move into Tesco's position, Buffett has somehow voted for Tesco in terms of long-term business competitive advantage and the CEO Philip Clarke.
Tesco had introduced a major price-cutting initiative called “Big Price Drop” in the summer with an attempt to revive sales levels in the consumer slowdown in shopping. Nevertheless, as always, the £500 million price-cutting campaign triggered price wars. Competitors responded aggressively with price discounts and coupon offerings.
The program was helpful in terms of delivering additional volume, but it couldn’t offset the hit in Tesco's margin. The consumers drawn in had not been enough to offset the lower prices. But the CEO believed that the investments in the chain’s stores would deliver more value in the future. “We delivered a very good Christmas shopping experience for our customers but in a highly promotional market, the volume response to our increased investment into lowering prices did not offset the deflation it has driven," he added. "The wider improvements in the shopping trip that are an integral part of strengthening our performance are still to work through fully."
In terms of the outlook, Clarke gave the warning profit outlook on Tesco performance in this weak consumer shopping environment, indicating the expectation of low growth profit for the year: “In a challenging consumer environment at home, and with early signs of more cautious behavior emerging elsewhere, we have seen more strain than anticipated on our profitability during the important seasonal trading period. As a result, while underlying profit before tax and earnings per share for 2011/12 will be broadly in line with market consensus forecasts, we expect Group trading profit growth to be around the low end of the current consensus range. Our plan for 2012/13 now reflects substantially increased investment to deliver an even better shopping trip for customers – particularly in the UK. Consequently, we anticipate minimal Group trading profit growth for the year.”
Right after that, the market reacted very strongly in its stock price. Tesco immediately lost 16% of its market value, and it lost more than 22% when the stock price dragged down from ÂŁ411 per share to only a little more than ÂŁ320 per share, wiping out more than ÂŁ7.2 billion in just two weeks.
Now Warren Buffett with the recent shot-down in its price, our legendary investor Warren Buffett had increased his stake in Tesco from 3.21% to 5.08%, following the January 13 regulatory filling. Warren Buffett began to buy Tesco since 2006, and he gradually increased his holdings. Just more than half a year ago, Buffett shared his views on the company’s struggle to establish itself into the world’s largest grocery market. He mentioned that Tesco should take a hard look at its U.S. Fresh and Easy chain, “which I am sure they are doing.” Warren Buffett and Charlie Munger joked that Fresh and Easy should be renamed “Fresh and Hard.”
With the current price, Tesco is valued quite cheaply compared to its historical valuation. The market is valuing Tesco at P/E 9.7x, 1.6x book value and only 4.8x cash flow, whereas the five-year average stays at 15.4x P/E, 2.6x books and 6.2x cash flow. With the recent move into Tesco's position, Buffett has somehow voted for Tesco in terms of long-term business competitive advantage and the CEO Philip Clarke.
