Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Is The Accounting Scandal A Bottom In Pessimism Toward Tesco?

By CMC Markets (Jasper Lawler)Stock MarketsOct 23, 2014 16:07
uk.investing.com/analysis/is-the-accounting-scandal-a-bottom-in-pessimism-toward-tesco-1289
Is The Accounting Scandal A Bottom In Pessimism Toward Tesco?
By CMC Markets (Jasper Lawler)   |  Oct 23, 2014 16:07
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Tesco (LONDON:TSCO) the UK’s largest supermarket, issued its first profit-warning in 2012 for twenty years. Fast-forward to 2014 and several quarters of declining revenue and market share caused Chief Executive Philip Clarke to lose his job. No sooner had new CEO Dave Lewis settled in, that Tesco went from stalling into a tailspin, when it was revealed the company had overstated its half-year profit guidance by £250m.

The Financial Conduct Authority has initiated a full-scale investigation into the profit overstatement and its investigation will be a weight around the neck of Tesco shares until completed.

With a new scandal erupting in South Korea with respect of the illegal sales of customer data, the problems seem to be piling up for new CEO, Dave Lewis. He can only hope to win back investor confidence with his own investigation into the UK scandal, using Deloitte and the law firm Freshfields to offer a clear explanation on why the profit misstatement happened and why it won’t happen again. Hopes of a sale of the Korean operations could well draw a line under that particular problem.

Tesco’s share price is down 46% year to date, having lost over 20% since the accounting scandal broke. Investors are already pricing in the worst so if it turns out that the loss is a lot more than £250m and/or it is deliberate fraud, then Lewis would be better off having Tesco come clean while the share price is down.

If properly handled, the accounting scandal could mark the turning point for Tesco. Olympus, the Japanese camera-maker was at the centre of the biggest corporate accounting scandal in Japanese history. Olympus stock plunged 80% in two months from October 2011 when the news broke but despite multiple regulatory investigations, never looked back and is now at its highest since 2007.

In fact, Dave Lewis would do well to throw the kitchen sink at reforms in most areas of the business.

More changes in personnel at the management and board level would increase confidence that more of the same is not on the cards.

Tesco has slashed dividends. The dividend cut is a good sign management appreciate the scale of the problem; the funds can build the kind of war chest needed to turn Tesco around. The problem is that shareholders will be left with a distinctly lower yield and without a key reason to maintain their holding.

Tesco in the last few years has sacrificed return on capital employed for expansion, even running loss-making operations like Fresh and Easy in US. The recent release of a tablet to compete with the likes of Apple Inc (NASDAQ:AAPL) is too far from its core business and epitomises where Tesco is going wrong. If Samsung Electronics Co (LONDON:0593xq) is finding the tablet market tricky, Tesco might be advised to stay clear.

Peripheral business ventures including overseas stores, the online video streaming service Blinkbox as well as Dunnhumby, which runs the supermarket’s club card marketing business should get the chop if they are not generating sufficient margins. That extra cash can be a buffer against future dividend cuts.

It’s well known that Tesco as well as Sainsbury (LONDON:SBRY)’s and Morrisons (LONDON:MRW) are facing stiff competition from Aldi and Lidl. Aldi and Lidl have had stores in the UK for two decades but became a lot more ubiquitous in the last few years when more cash-conscious consumers sought out cheaper alternatives to major supermarkets during the recession.

Studies have shown that the majority of customers have not shifted one hundred per cent of their shopping from Tesco to Aldi, rather just started shopping at both as well as using other sources including shopping online. Consumption habits have changed so there is no going back for Tesco; the company needs to adapt through the use of online shopping, convenience stores and perhaps different brands with different pricing models.

Tesco’s shares are down heavily thanks to the profit misstatement; this normally might bring on speculation of a take-over bid. The risk associated with acquiring one of the UK’s biggest retailers with possibly more disgrace to be unearthed would likely be too much for most potential buyers.

The accounting scandal should mark the bottom in pessimism for one of the UK’s pre-eminent businesses as it did for Olympus Corp. (TOKYO:7733) in Japan. But to do this Tesco need to change the management dynamic, secure the dividend and streamline their business into core, complimentary services that give customers the kind of diversity in price and service they now expect from their grocer.

DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Original Post

Is The Accounting Scandal A Bottom In Pessimism Toward Tesco?
 

Related Articles

Edison Group
EMIS Group: Commercialising Recent Investment By Edison Group - Sep 14, 2021

EMIS Group (LON:EMISG) reported H121 results ahead of board expectations and is on track to meet the company’s FY21 expectations. After a period of investment to develop the...

Is The Accounting Scandal A Bottom In Pessimism Toward Tesco?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The inherent concept of such investments means that they are not suitable for the investor seeking income from such investments, and are only suitable for those who have the required experience and understand the market risks. You should carefully consider your investment objectives, level of experience, and seek advice from an independent financial advisor if you have any doubts.
Continue with Google
or
Sign up with Email