It’s getting harder to describe a Tesco profit warning as a “shock” these days - but the fourth warning this year from the UK’s largest supermarket still sent its shares plummeting.
When CEO Dave Lewis announced on Tuesday morning that Tesco’s full year pre-tax profits would not exceed £1.4bn - analysts had expected profits in the region of £1.8bn to £2.2bn - Tesco’s shares fell 16% to a new 14-year low of 155.4p. Tesco’s shares have lost well over half their value - close to £14bn - since the start of 2014.
The shares crept back up once Lewis explained the lower profits were the result of rejecting short-term measures to prop up profits, such as January staffing cuts. On Thursday morning, Tesco had recovered somewhat to trade 6.5% down since the profit warning, at 175p.
The announcement was seen as a prelude to Tesco’s trading statement on 8 January, when Lewis is expected to lay out his strategic plans in more detail. SocGen analysts worried the collapse in profits signified an increased likelihood of a ratings downgrade, noting: “We see a real risk of a downgrade to ‘junk’ if it does not make disposals in the short term.” However, Shore Capital said: “Tesco still has the flexibility to engineer a recovery over a 12 to 18-month period without recourse to a balance sheet restructuring, even if the UK margin moves to 0% for a period of time.”
The other listed supermarkets also suffered in a general sell-off of the sector - with Morrisons closing 4.4% down at 176.7p on Tuesday (dipping further to 174p by Thursday morning) and Sainsbury’s falling 1.8% to 231.6p.
Though Sainsbury’s fell 4% in the three days to Thursday, to 226p, it received a boost from Bernstein this week. Weekend reports suggested activist shareholder Crystal Amber was exploring options to bid for the group, but Bernstein said the supermarket was currently significantly undervalued. Giving it a 330p price target, the broker claimed: “Sainsbury’s does not get credit for its years of outperformance of its peers and the quality differentiation as the root cause of this.”
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