Tesco under pressure as shares slide further after profit warning
Published 13/01/2012 | 10:41
Tesco remained under pressure after its first profits warning in 20 years, with a further £500m (€598.6m) wiped off the value of the shares today.
The shares fell 1.7pc in early trading and have now fallen 18pc in two days - a loss in value of £5.5bn - hit by a number of broker downgrades following disappointing Christmas sales and its admission that it needed to spend "hundreds of millions" of pounds improving customers' shopping trips.
Credit Suisse cuts its rating for Tesco to "neutral" from "outperform" with a target of 370p from 500p; Barclays Capital downgrades the retailer's rating to "equal-weight" from "overweight", with a reduced target price of 360p from 500p.
UBS, which cut its rating to "neutral" from "buy", said in a note: "Lower forecasts naturally result in a reduction in our price target. Furthermore the likely delay in evidence of improving returns and the lag in Tesco's remedial action delivering tangible results means that we think an imminent re-rating is now unlikely."
Among other target price changes, HSBC Securities reduced its target to 365pc from 410p. Citigroup cut its target to 275p from 330p.
On Thursday, Britain's biggest retailer warned shareholders that profit growth, which has been achieved with relentless regularity over the last three decades, was likely to come shuddering to a halt next year, as it fights to win back shoppers.
Analysts said a profit warning of this magnitude was unheard of in living memory and the last time the shares fell this heavily was on Black Monday, during the stock market crash of 1987.
Tesco said like-for-like sales fell 2.3pc, excluding petrol and VAT, in the six weeks to January 7. This was a far worse performance than Morrisons, which recorded an increase of 0.7pc, and Sainsbury's, which posted an increase of about 1pc on this basis.
It was also worse than analysts had expected, with most pencilling in a fall of no more than 1pc.
Phil Clarke, the chief executive, who took over from Sir Terry Leahy less than a year ago, said that bargain-hungry shoppers had been lured by coupons and discounts being offered by rival supermarkets.
He insisted that his Big Price Drop campaign, which saw prices at Tesco fall by £500m across thousands of different items had not been a failure, though he added: "we could have done a better job communicating it".
"There was a lot of promotional coupons around Christmas and in hindsight that's where we should have gone harder."
He admitted, however, that Tesco needed to sharpen up its act – not just in the quality and availability of its goods but the service it offered customers.
The company would spend most of this year spending "hundreds of millions" of pounds to fix the supermarkets, Laurie McIlwee, the finance director said.
It is likely that not only will more discounts be introduced, but extra staff hired, and fresh food ranges launched.
Analysts predicted this would cause its industry-leading 6.1pc operating profit margins, to slip markedly, possibly by a full percentage point.