Tesco boss Dave Lewis has been steadily winning plaudits for his stewardship of the supermarket, but its shares were hit hard this week after a broker poured cold water on its progress.
Tesco was the FTSE 100’s biggest faller on Wednesday, dropping 4.7% to 174.8p - its lowest level for two months - after JP Morgan Cazenove attached a 150p price target to the shares.
The broker said Tesco’s balance sheet “remains a concern” in the context of “thin margins and the more marked structural and cyclical headwinds within its core UK market.” It added: “Tesco’s ability to generate cashflow in the foreseeable future could be more constrained than we thought before the results. The results were of lower quality than seemed at first glance [and] upcoming news flow will likely remain negative.”
The broker also calculated that Tesco’s operating costs had risen by £200m, indicating that margin recovery could be slower than the market expects. Tesco shares dropped another 1.2% on Thursday morning to 172.6p.
Elsewhere, Sainsbury’s edged up 0.7% to 290.3p on Wednesday despite a mixed set of full-year results for Home Retail, which it is in the middle of acquiring. The Argos owner’s shares stayed above water by the end of the day to finish 0.2% up at 170.5p after announcing a 28% fall slump in full-year pre-tax profits and flat Argos sales, but a 7% rise in the retail chain’s online revenues.
Premier Foods received a much-needed boost this week, with the shares rising by 7% back up to 40p on Wednesday after an upbeat note from broker Jefferies. Premier’s shares had sunk back to around 37.5p this week, having traded above 60p before US food group McCormick dropped its potential takeover bid. But Jefferies analyst Martin Deboo put a 60p price target on shares after “concluding positively” on the new growth plans. He wrote: “Premier’s LFL growth since float has been just positive. Below new guidance but arguably better than prejudice might suggest.” However, the broker also warned: “There is plenty of risk, and growth depends acutely on new NPD”.