Tesco shares fall 5 Lack of strategy is its biggest problem

Tesco this morning reported their second half year trading figures to the market in what was a fairly volatile report. The numbers from Tesco were always likely to be under much scrutiny following the £250m overstatement the firm admitted last month.

Whilst the trading profit reported is a tad higher than estimate, the lack of clarity over full year profit projections and the deeper than expected impairment taken for the miscalculation by the firm (and auditors Deloitte) will weigh on sentiment.

The numbers

• H1 pretax profit falls -23.6% to £80m
• H1 group trading profit before tax and one-off items (statutory) of £112m (-91.9%)
• Overstatement of profits stands at £263m (£250m originally reported)
• £118m overstatement of profits relates to H1
• £70m overstatement of profits to affect H2
• UK like for like sales -4.6%
• Sir Richard Broadbent, Tesco Chairman, to step down
• Will not issue a full year profit forecast
• CEO Dave Lewis has not finished his strategic review

Lack of strategy or a plan the biggest problem

The numbers from Tesco are a bit of a mixed bag. Whilst the actual profit number could have been much worse, particularly taking into consideration the latest trends and market share from Kantar – where Tesco is continually being hit the most – its the lack of clarity in strategy and direction which is the most concerning here.

Not only is the firm reporting a bigger accounting error than expected, but it is also not giving shareholders any indication of what it could report as a profit for its full year. Whilst its hard to give an accurate number for the full year given the volatility in retail competition and the structural decline the grocery market finds itself in, this lack of clarity at a time when shareholders are now exerting perhaps their lowest level of confidence in the firm is staggering.

Dave Lewis is Tesco’s new CEO. He simply HAS to show his strength of leadership to steer Tesco through its worst crisis in decades. His failure to provide a detailed strategic direction for the firm at this stage will only deepen shareholder fears and cloud the markets view of how and when Tesco can bounce back. The fact the firm is unable to tell the market what it thinks it will report for a full year is perhaps the biggest worry. Either it’s own full year projection is too terrible to state (does not make sense as surely you would want all the bad news out at once) or it simply has no idea how it could perform (equally troubling!).

Rights Issue still a potential

Tesco boss Dave Lewis told shareholders and journalists after the results were published that if there is a need to review the way the firm funds a new strategy, they will look into all options to do that. This statement is a clear indication that the potential for a rights issue remains firmly on the table.

A rights issue (otherwise known as a cash call where Tesco seeks funds from shareholders) typically triggers a fall in share prices so if you are trading Tesco, do keep an eye on this element fir the near future.

UPDATED – please note that in the analyst call which followed their earnings release, Dave Lewis confirmed to reporters that Tesco does not currently have plans for a rights issue and will seek to prop up its books via asset sales.

Tesco shares price opens -5%

Tesco share prices opened sharply lower by between 5% and 6% down on the day within the first minutes of the trading session as investors sold yet more stock in the embattled retailer. The selling is a reflection of the lack of confidence to take from today’s H2 earnings update. Shares were trading at 174p after one hour of trading having hit a daily low of 170p. See chart below for the price activity in the trading session thus far.

City Index clients are net buyers of Tesco (at time of writing)

City Index connect users are currently net buyers of Tesco. Of all Tesco traders via Connect as at time of writing, 92% have bought Tesco shares, highlighting that traders are attempting to buy the dip. This could be a lucrative but highly risky strategy given the current price volatility. It’s important to state that whilst 92% are buyers, there is no indication on how long term their positions are aimed at, so do be careful. You can log in to connect via the Connect indicator within our Advantage Web platform. Connect shows you real time client sentiment across all of our markets.

As you can see from the historic chart below, Tesco shares have been in a nose dive over the past few years. Following the £250m warning last month, shares continued to freefall hitting a low of 168p, its lowest levels since 2003, some eleven years.

It’s hard to imagine that apart from buy and hold strategy, many buyers right now can hold onto their shares with any real degree of fundamental confidence, and this increases the chances of more price corrections. Do note the price support level of around 160p which has historically seen buyers emerge and could prove a pivotal point in whether these declines continue in the long term.