Tesco’s Finest Stores Debut Could Be A Potential Challenge For Brands Like Simply Food

Tesco PLC (TSCO) is a British retail company and is one of the world’s largest retailers of consumer goods. The group primarily operates as a grocery retailer but also provides insurance and retail banking services. Operations are primarily differentiated in two operating divisions: Retail, which includes retailing and associated activities, and Tesco Bank, which comprises of banking and insurance services. The Retail division is further divided into three geographical segments: UK & ROI, Central Europe and Asia. In the first half of FY 2019, the group reported an increase in revenue for the 11th consecutive quarter.

Recently, the UK’s largest retailer presented the idea of “Finest Stores” to the investors and analysts. The group is considering opening upmarket convenience stores that would challenge brands like Simply Food of Marks and Spencer. Through this move, the large-cap retailer is trying to recoup its sales growth and profit margins.

The group estimated that this move could take their operating profit margin to 7%, which is almost twice the level of margin that the group is making. Tesco has around 1,855 small stores in Britain, including Express convenience format stores. Through its wholesale arm Booker, the group has several thousand of independently owned small stores.

Launch of Finest Stores could be a substantial risk to the companies like Marks and Spencer. M&S had around 700 stores of Simply Food, also in the past couple of months, the group has narrowed its expansion of Simply Food stores and focusing on launching large food stores, where they can distribute their extensive range of product portfolio.

David Lewis, CEO at Tesco Plc, commented that our focus in future would be on total sales rather than like-for-like sales growth and cash generation rather than profits.  However, a bunch of analysts assumes that this move will help in cost reduction, and the margin could expand in the current financial year.

Trading Update

As on June 13, 2019, the group reported its trading update for the 13-weeks ended to May 25, 2019. The group’s total sales for the period recorded a growth of 0.4% on a constant currency basis and stood at £13,978 mn, and on a like-for-like basis, the group reported an increase of 0.2%. During the period under consideration, group’s UK and ROI sales grew by 1.3% (on a constant currency basis) to £11,168 mn, sales in Central Europe narrowed by 7.9% to £1,296 mn and sales in Asia surged by 2.6% to £1,244 mn, however on a like-for-like basis, the sales growth in Asia was marginally above the previous financial year.

Financial Highlights: FY19

During the financial ended as on February 28, 2019, the group reported a headline sales growth of 11.3% and sales stood at £56.9 bn against £51.0 bn recorded in the year-ago period. This growth was driven by a 2.9% growth in the UK and ROI LFL sales (including 1.7% growth in Tesco UK and 11.1% growth in the Booker), Central Europe LFL sales narrowed by 2.3% on a YoY basis and Asia LFL sales declined by 6.2% against the year-ago period. However, the group’s statutory sales stood at £63.9 bn against £57.5 bn recorded in the year-ago period. Operating profit on a statutory measure surged by 16.7% to £2,153 mn and pre-tax profit surged by 28.3% to £1,674mn. Diluted statutory earnings per share stood at 13.55 pence against 12.11 pence in FY18. (at actual exchange rates).

During the FY19, per share dividend recommended by the board stood at 5.77 pence, as compared to 3.0 pence recorded in the FY18. Dividend per share increased by 92.3(%) on a YoY basis.

Note: All figures recorded above are on constant rate, unless mention exclusively.

Financial Ratios

In FY19, reported EBITDA margin of the group stood at 5.7%, slightly above the industry margin of 5.6%. During the FY19 period, the group handed a return on equity (ROE) of 10.4%, which was relatively below the industry median of 11.1%. The short-term liquidity position of the company in terms of Current ratio stood at 0.61, which indicates lower liquidity position of the company to meet its short-term liabilities against the peer group median of 0.85. In the company’s capital structure, long-term debt accounted for approximately 25.7%, narrowed considerably against the previous year contribution of 37.4%.

Stock Performance

Daily price chart (as on June 20, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close at 08:49 AM GMT), shares of the TSCO were quoting at GBX 233.4 and marginally declined against the previous day closing price. The retailer has an outstanding market capitalisation of £23.01 bn, which ranks it among the large-cap companies listed on the London Stock Exchange. The dividend yield of the stock stood at 2.46%. The group is a key constituent of the broader indices like FTSE 100, FTSE All-Share and FTSE 350 respectively. The stock was carrying a Beta of 1.20, which indicates the stock is relatively more volatile against the benchmark indices.

52wk High/Low range

In the past 52wks, shares of the TSCO have registered a high of GBX 266.80 (August-10-2018) and a low of GBX 187.05 (December-28-2018) and at the current market price, as quoted in the price chart, shares were quoting around 11.8% below the 52w high price level and approximately 25.9% above the 52w low price level.

Volume Summary

The 5-day average daily volume traded in the stock stood at 29,820,902.60, which was around 35.94% above the 30-day average volume traded in the stock at the London Stock Exchange. In Thursday’s session, total volume in the stock stood at 7,848,378 with 2,865 trades took place at the bourse.

Price Performance (%)

On a year-to-date basis, the stock has surged around 23.6%, whereas on a YoY basis the stock has delivered a negative price return of 8.2%. However, in the past five sessions, its shares have surged 3.3%.

In the past one year, shares of TSCO have ended 118 times up, 127 times down and remained flat for 8 times against their respective previous day closing price. On a YoY basis, the Up/Down ratio in the stock stood at 0.94. However, in the past one-month, the stock ended 11 times up, 10 times lower and remained unchanged for 1 day against their respective previous closes.

Simple Moving Average (SMA)

From the SMA standpoint, shares of the TSCO were quoting around 5% above the 200-day simple moving average price, which is a positive technical indicator for the stock and carrying the potential to move up further from the current trading levels.

Relative Strength Index (RSI)

The 3-day RSI of the stock features in the bullish zone at 76.01 and 14-day RSI was hovering in the neutral region at 53.95.

Bollinger Band®

Upper Bollinger Band® of the stock stood at GBX 236.45, the lower band stood at GBX 222.43, and the 20-day SMA of the stock held at GBX 229.4, which indicates the stock is trending towards the upper band and could surge further from the current trading. However, it has crucial resistance at GBX 236.45.

Tesco has a robust business model and significant global presence; Finest Stores initiative could really help the UK’s biggest retailer to chop down its costs and expand margins in the coming years.

Considering the above discussed fundamental and technical measures, the overall outlook in the stock looks good. The group is trading above the 200-day SMA level, which is strengthening the future growth in the stock price.