Tesco shares on the slide despite return to profit

Added 13th April 2016

Tesco saw its shares slide over 5% despite reporting a return to profitability after a troubled period.

Tesco shares on the slide despite return to profit

The shares recovered moderately during the morning before slipping again, but that did little to disguise the fact that the market had expected more from the troubled supermarket.

The supermarket said statuary pre-tax profits were £162m, a significant reversal from the £6.33bn loss last year. Diluted earnings per share were up to 2.76p from a 65p loss per share last year, while like for like sales crept up by 0.9% over the last quarter.

Chief executive Dave Lewis hailed the turnaround and put a predictably positive spin on the situation. "We have made significant progress against the priorities we set out in October 2014,” he said.  “We have regained competitiveness in the UK with significantly better service, a simpler range, record levels of availability and lower and more stable prices.  Our balance sheet is stronger and we are making good progress in rebuilding trust in Tesco and our investment case.”

Major shareholders in Tesco include Schroders, Blackrock, Legal & General Investment Management, Norges Bank and Deutsche Bank.

“There are tentative signs at Tesco that the oil tanker may be starting to turn, but it’s going to take some time before the vessel is ploughing along in the right direction,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.

“An uptick in sales in the fourth quarter was much needed, but profits growth is likely to remain muted while the supermarket continues to invest in its pricing proposition,” Khalaf added. “The cost of a typical Tesco shop fell by 3% over the year, and the discounters Aldi and Lidl are going to keep up the pressure on the supermarket to make prices even keener."

Khalaf also noted that investors may need to show some patience with the supermarket as the turnaround grinds on, and wait for this feed through to the bottom line. “Tesco remains a stock for recovery investors who are willing to be patient in waiting for a turnaround, and are prepared to stomach setbacks along the way,” he added. 

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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