Is it time to buy Tesco shares?
By
Associate Editor
David Stevenson Nov 21, 2008
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Tesco dominates UK food retailing
It's a "bloodbath on the high street", says yesterday's Guardian.
A rescue takeover of wobbling Woolworths is "close to collapse", says today's Telegraph. Meanwhile shares in DSG – formerly Dixons – have collapsed by more than 75% in the last two months to a record low, valuing the business at the equivalent of just ten days' sales. And leading high street bellwether John Lewis says that last week's sales plunged 14%, one of the worst ever falls.
All dramatic stuff. So you'd expect to see at least some of that damage showing up in the countrywide retail results.
Yet October's official retail sales figures from the Office for National Statistics (ONS) still showed a mere 0.1% drop. The experts were expecting a top-line decline of almost 1%, which would have been one of the worse turnouts in recent years and would have been in line with recent surveys from the British Retail Consortium, the CBI and the Bank of England's Agent's Scores.
But when you dig beneath the headline figure, you soon find the real bad news – you just need to look at the results for 'non-food' shops. Clothing sales dropped 1.5% compared with September, when in turn they had slipped 2.4%, while turnover in household goods tumbled 3.4% following the previous month's fall, also of 2.4%.
That does fit in with the anecdotal evidence, which also "suggests that the past couple of weeks have been even more shocking for retailers, as illustrated by the widespread price discounting announced this week", says Capital Economics. The group reckons that a mix of rising job losses and tight credit means that "it's shaping up to be a pretty awful Christmas for retailers".
"The opening bell will be rung today on a brutal price war", says The Times, "as retailers slug it out for the shrinking consumer purse". Debenhams is launching a three-day "spectacular" sell-off and even Marks & Spencer was slashing its prices by 20% to pull in shoppers and shift unsold stock.
"The retail environment looks an awful lot worse than the official figures suggest", says Jeavon Lolay at Lloyds TSB, "consumer spending will get worse. The Bank of England is still going to be cutting interest rates, and we see a 1% reduction next month".
When an economy is heading south as fast as ours, it's debatable how much difference such a cut would make in the longer run. But given that it's the run-up to Christmas, it might persuade people to splash a little bit more cash around, whether it's sensible or not.
The key will be where they'll do it. And the other side of those retail figures was that spending on food stayed remarkably solid, up 1% on the month. While volume growth has remained static over the last three months, that's a result many high street chains would happily swap for their own current sales records.
The crunch is biting hard, but people still have to eat. And if they cut down on restaurant meals, and eventually takeaways too, the grocers look best-placed to benefit.
All of which makes you wonder whether Tesco (LSE:TSCO), which has nearly a third of the food sales market, isn't starting to look almost cheap. At 292p or so, its shares are at a four-year low, and are trading on a p/e for next year of under 10x. The prospective yield of nearly 4.5%, is looking more and more attractive as interest rates fall further and further.
We're still quite wary of buying UK shares right now, particularly in sectors like general retail. But even in such dire days as these, there must be a market rally at some stage. So if you do feel like dipping a toe in the water - and another 10% off the price would be nice - Tesco might not be a bad place to start.
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