Throughout the last decade, Tesco plc (TSCO.L) was at the forefront of the globalization trend. A 2006 headline stated, “Foreign growth key to Tesco goals.” Now, it looks like global ambitions are headed for the checkout counter at Britain’s largest grocer.
Back in 2006, Tesco had far-flung operations throughout Eastern Europe and parts of Asia. In the same year, Warren Buffett, the “sage of Omaha,” announced an initial 1% holding in the company. The high water mark of global ambition came with the Fresh & Easy brand, which failed spectacularly in the western United States. Fast forward to April, 2013: the company confirmed it was exiting the United States at a total cost of approximately £2 billion ($3.2 billion). Other divestments seem likely, particularly in Eastern Europe, as the retail chain focuses on investor returns rather than global expansion.
While it’s been a tough few years, the market may be assuming sustained and ongoing weakness at Tesco — essentially, a continuation of the troubles highlighted in Q2 numbers released yesterday (see here).
Leaving aside the short term quarterly data, you can see (if you aren’t too bearish by disposition) some light at the end of the tunnel in the below graph showing U.K. and Eurozone retail. While neither series appears in rude health, it is clear that U.K. retail sales are gradually grinding higher, though the European index remains disappointing. Nonetheless, the TSCO share price doesn’t seem to have risen far when one compares the significant rebound in U.K. retail, far and away its largest market.
Source: Eikon
Lower multiple
It seems that the problem is company-specific. If we examine the broader Food Retail index, it’s clear that there’s been significant multiple expansions as the retail environment lightened. It’s just that TSCO wasn’t invited to the party. It’s now trading at a lower multiple than three years ago. There have been a number of significant setbacks – the U.S. and a historic profit warning, to name two – and clearly the market will no longer give the company the benefit of the doubt.
Source: Eikon
Silver lining?
So is this a story of a company retreating to its core markets, consolidating core assets and leaving behind its vision of global domination? Well, partly. The last five years were a difficult time to introduce a new shopping center format into the U.S., with the Sunbelt region targeted by Tesco (California and the southwest) savagely hit by the recession and declining home values.
Amid all the gloom there may be a silver lining. Tesco’s under-performance seems to have moved it to the back of the class – with investors now pricing Tesco at a lower multiple than its peers.
Source: Eikon
Poised for a comeback?
For those that remember the halcyon days of the last decade, it seems difficult to imagine Tesco can’t regain its mojo. Its club card system and many other innovations made it an industry leader. Today, in a nod to the changing technology environment, it’s experimenting with a cheap tablet, known as the Hudl, which PC Advisor calls a legitimate rival to the Kindle Fire and Nexus 7. Perhaps these are signs that underneath the failed execution of recent years, the competitive fire still burns bright. Trading at a P/E of 10.7 after its recent disappointing earnings update against a 10 year median of 13.3, it seems it may be time to take another look. As the Tesco motto says: “Every little helps.”
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