The Tesco share price slumped 8.6% yesterday and has failed to stage a recovery on Thursday following the reporting of operating profits that fell short of analyst forecasts. £933 million was reported against expectations for a figure around £978.
While missing analyst forecasts is not uncommon, investors may well not have expected the company’s operations in Thailand and Poland to be to blame for a supermarket that is one of the UK’s biggest brands and where it generates the vast majority of its revenues. Sales in Britain and Ireland were strong, the like-for-like figure for Q2 showed a 4.2% rise, passing 4% growth for the first time in a decade. However, the market focused on a disastrous performance in Thailand, which saw a 29.1% fall in profits and 9% fall in like-for-like sales over the reported period.
The company’s Central Europe unit, which includes supermarkets in Poland, Slovakia, Hungary and the Czech Republic also fared poorly. Like-for-like sales fell 1.5% across the region and profits 3.3%. Poland, which recently changed its Sunday trading laws and where Tesco has never made a profit, was the main drag.
Tesco is one of the most held stocks of Brits investing online into their SIPPs and ISAs. Almost every online stock broker in the UK puts it in the top 10 of the individual equities held by their clients. The supermarket giant may not offer the kind of rocket-fuelled growth of the big tech companies and has seen its market share eaten into by German discounters Lidl and Aldi, resulting in a slide in share price over several years up to 2015.
Nonetheless, it is considered a good, reliable company and under the leadership of chief executive Dave Lewis has seen its share price stage a strong recovery over the past few years. In April, Tesco reported annual profits had surged 800% on Lewis’s restructuring and a dividend was paid out for the first time since 2014. So yesterday’s news and subsequent drop in share price will have come as a blow to investment portfolios held with online stock brokers up and down the country.
With over two thirds of Tesco’s profits coming from the company’s business in the UK and Ireland and international units dragging on group performance, Lewis, who has until now been hailed as a messiah, may find himself under increasing scrutiny from activist investors over the company’s focus. However, while Lewis stated Tesco is working towards ‘resetting’ its business in Poland, he also refuted suggestions the company might be considering, or should if it is not already doing so, divesting itself of its Central Europe unit.
Thailand, despite the recent slump in performance, which is the result of government ‘welfare cards’ for groceries that can only be used in Thai-owned chains, is still, however, Tesco’s most profitable unit.
Commenting on the travails of the international units, Lewis stated:
“There have been lots of potholes in the road over the last three and half years and this [problem in the international business] is one of the things we are working through . . . We are bang in line with where we want to be.”