Is It The Right Time To Enter Tesco PLC (LON:TSCO)?


There is a lot of negative news as far as Tesco PLC (LON:TSCO) is concerned. The company reported a record loss in the financial year ended March 2015. The latest negative news was that it had lost its investment grade credit rating from Fitch. The rating agency has now rated the company’s credit as Junk status. This might not be surprising considering that other rating agencies such as Moody’s and S&P had made a similar move three months back. However, the question that haunts every investor is whether there is any life for the company and if so what’s the entry point.

Tough Job On Hand

As far as Tesco PLC (LON:TSCO) is concerned, it is not going to be easy to win back the confidence of investors. The company reported the sixth largest loss in the history of the United Kingdom’s corporate world. The company suffered a whopping loss of £6.4 billion recently. Part of the reason for such a hefty loss was due to writing down of its fixed asset base by as much as £4.7 billion. The company believes that it was a reflection of an expected difficult trading atmosphere in the future.

In such a situation, like any other company, Tesco PLC (LON:TSCO) has also initiated its turnaround plans. However, it would take time to have any favorable impact on the company’s performance. It would be tough to get funds since its credit status has been rated as junk. Therefore, it needs to find funds to put the company back on the track.

Overhauling Deals with Suppliers

The Britain Company has taken to the overhauling of its deals with suppliers. The company is trying to simplify its deals with the suppliers. This was warranted because it was trying to put the overstatement of profit behind it. The current crisis was also part of it.

Recently, Tesco PLC (LON:TSCO) figured out that £50 million of commercial income was overstated in previous years. As a result, previous misstatements increased to £208 million from £145 million. The earlier impact of commercial income was only £118 million till February in the current year. This scandal has prompted the company to initiate inquiries. Its CEO, Dave Lewis, said that commercial income fueled by a profit-centric had clouded the purpose.

Previously, the Britain retailer agreed for an upfront price with the suppliers, which is known as, front margin. However, the British retailer appears to be doing the opposite and using ‘back margin’ to get a better deal with suppliers.

Reducing Suppliers

The retailer has decided to cut down to just three suppliers for the company’s  products under its own label. For the branded suppliers, Tesco PLC (LON:TSCO) decided to have five suppliers. This is expected to drop to three by the turn of the year 2017. Its commercial director, Jason Tarry, indicated that it required three mechanisms to adjust the final price.

First and foremost was to get a better deal from the suppliers on the basis of goods sold. Secondly, the retailer should have an agreement to recover costs or replacement if there would be any issue on the specific product with the suppliers. Lastly, the pricing should reflect on the prominence it gained in the shelf space. The company should attach value to the premium positioning.

Key Takeaways from Annual Report

Tesco PLC (LON:TSCO) suffered a loss of $10.47 billion in the fiscal year ended March 2015. While the loss was certainly a bad news for everyone, some of the positives cannot be overlooked. The company suffered a long slump and lost market share too as it faced pressures from the discount retailers. The company’s CEO said that it has already dealt with whatever it knew. The company would also continue to make investment to get back lost market share at the cost of profit.

Commercial income is nothing but promotional money, rebates, and discounts from suppliers. This has led to overstatement in the previous year. Lewis has already indicated that it would simplify the deal with the suppliers. The company had as much as 24 suppliers and would be reduced to five in the current year in an effort to use economics of scale to drive better prices.

Positive Takeaways

One of the positive factors for Tesco PLC (LON:TSCO) was that the recovery in Britain looked on track. For the first time in four years, the company’s like-for-like sales witnessed one percent growth in the fourth quarter. This has impressed many analysts, who termed it as solid trading results. The company has made sweeping changes including reducing prices, adding staff on the shopping floor, and simplified ranges. Investors’ were also happy with the strength it could see back home in the United Kingdom. As a result, now profitability in Britain looked better than expected.

The second favorable thing was the pension deficit. Though it had increased to £3.9 billion in the fiscal year ended March 2015 from £2.6 billion, analysts’ were estimating a much higher deficit, especially in this low rate environment. The retailer reached an agreement with a pension trustee by paying £270 million every year to reduce the deficit.

Struggling At Global

Tesco PLC (LON:TSCO) delivered poor results from its global business wing. The company has already pulled out of the United States and Japan. Though it struck a joint venture agreement in China, it could operate only from eleven countries internationally. Lewis said that market conditions were not good enough in Asia pointing out 4.1% fall in revenue in Asia. He also said that Europe’s sales were also below its expectations.

Conclusion

Everything depends on the turnaround plan. There are number companies that turned around after suffering continuous loss. Similarly, Tesco PLC (LON:TSCO) too has the opportunity to turn it around simply because of its brand name. The markets have also improved domestically and now the onus is Tesco to improve its results for a bounce back to occur.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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