Stock of the Week Tesco Under Pressure

Stock of the Week: Tesco Under Pressure

Stock of the Week Tesco Under Pressure

Has the rough patch ended for Britain’s largest supermarket chain

After another profit warning yesterday, Tesco shares slumped as much as 16%, before recovering to £1.7363. The company is still making a profit, but the most recent numbers are far below market expectations. Is this another issue after the accounting problems several months ago, or is it time to look for a bottom in the price?

The main issue surfaced on September 22, when a difference of £263 million was found between the stated profits and the actual ones. The “error” came from the fact that Tesco had already entered its increased income from commercial operations, but delayed entering the expenses for the expansion of said operations. After this became apparent a second wave of problems came into play.

Suppliers immediately employed outside auditors to double-check all dealings with Tesco and this put a strain on their relations, immediately squeezing profit margins and most importantly – the trust. The company is now looking at a year-end profit of £1.4 billion which is significantly lower than the analyst consensus of £1.94 billion.

Warren Buffett also got in the Tesco news-feed, with his admission that he’d made a “huge mistake” in buying over 5% of the company’s stock. The ownership through the billionaires investment company Berkshire Hathaway has now been lowered to 3%.

But is the company set for a rebound or will the damages have more long-lasting effect? Many argue that the storm has passed, with fraud investigations almost over and no indication of further damaging evidence.

The questions is whether the fundamentals of the company – its focused local expansion (the international one is still to see good returns), the positioning of the brand as the British discount leader, while still retaining the middle-class shopper. Not to mention the success in retailing products such as books, furniture, toys, clothes and electronics. Their foray into online and mobile services is also worth mentioning, albeit with a smaller scope.

Share prices have experienced several volatile days this week and have lost around 45% this year, but some traders are saying that the drop is driven by the power of the scandal and not by any fundamental reasons that need to change.

The future will show us where the company is headed, but even after all the commotion the company still has the largest share in the UK. Others are cautious, as they wait for the problems to dissipate, while keeping an eye on emerging sources of competition. Apart from the old rivals Asda and Sainsbury’s, another threat are online shopping services that are popping up in the US, and the UK usually follows them closely in setting new commercial trends.

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