What next for Tesco?

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Bargain hunters moved in on Tesco (TSCO) shares at the sound of the opening bell on Friday.

Following the 16% plunge in the previous session, there were plenty of buyers despite a fresh slew of analyst downgrades and by mid-morning the shares were back in positive territory at 324p.

By mid-afternoon, however, investors were left wondering whether the early buy-up had been a false dawn as the stock slipped into the red once more and clocked up a new 52-week low.

Analyst views remained mixed, too. Credit Suisse removed the retailer from its Focus List and demoted it to 'neutral' from 'outperform', slashing its target price in the process from 500p to a more realistic 370p.

But this was counteracted by an unequivocal upgrade from Alphavalue, which upgraded the stock from 'reduce' to 'buy'.

Even so, existing and new investors will want to look further ahead to assess the potential impact of Tesco's plans to rejuvenate the business.

End of the space race?

One concern is that the supermarket's strong position as a landowner and buyer looks set to change.

According to Alphavalue, the latest property asset valuation of £36 billion shows that the portfolio of the supermarket giant, known for its ubiquity, reflected recent firming yields across the market and confirmed that Tesco's assets are worth more than their book value.

It is also a very active vendor, selling £6 billion of property globally in the last five years and raking in net divestments of £5.2 billion on which it has made profits of £1.3 billion of profit.

Analyst Dave McCarthy at Evolution Securities, who specialises in the sector, voiced his concerns in a detailed note. He pointed to Tesco's intention to curtail its opening programme in the UK, describing this as a signal that it is hoping to end the 'capital war' which is seeing c£5 billion invested into new stores across the industry each year, adding around 5% capacity.

The numbers will not be known until April when full-year figures are released, leaving many feeling that there are more questions than they answer at the moment.

McCarthy, who appears bearish on Tesco, believes that if the other big supermarkets fail to follow its lead on the space race then it could expose Tesco's flank to further erosion as competitors cash in on cheaper land.

"We are not saying Tesco is wrong to reduce openings and we believe the capital war needs to end, but we do not have enough information right now to make an informed decision on what Tesco cutting back capex means to the industry. However, it does suggest that site prices may be overvalued," he warned.

If Tesco's position as a tenant also diminished it would impact on its own landlords, including the likes of its joint venture partner British Land (BLND).


Reduction of overheads and infrastructure is also pertinent to Tesco's attempts to capitalise on already-impressive e-commerce sales.

In Friday's statement, chief executive Philip Clarke pointed to total online sales growth of more than 14% in the period and it would make perfect sense to amplify this market.

There is also the potential for two bites of the e-tail cherry if Tesco can keep selling customers the computers and tablets in the first place.

Pushing online sales would allow a breathing space to fix the group's service problems.

"Tesco admitted for the first time that it has long-standing problems around range, quality and service. These problems have been evident in stores for a long time and we have written about them previously. It is clear that Tesco had slashed wages to stores to try and preserve profits and that this, like pushing prices up, is a short-term fix at the expense of future profits," explained McCarthy.

He blamed the fact that part of Tesco's margin reinvestment back into the business will be defensive and will be putting past mistakes right. "This will not necessarily lead to sales improving, it might just stop them getting worse. Again we do not have the information on which to make an informed judgement, but at least Tesco is now admitting it has some long-term problems."

Looking for more on the retail giant? See what more investors and analysts were saying in: Should I buy shares in Tesco?