Tesco Plc (Tesco) is a multinational retailer of general merchandise and has been under investors’ radar lately. As at January 30, 2019, mid-day trading, the stock (TSCO.L) was seen to be moving in red zone at 220.70 GBX. The company has a resilient business model despite a challenging retail environment, and it carries out operations through multi-format stores and online. Its stores are classified into six formats differentiated by size and range of products sold including Superstore, Extra, Metro, Express, Dotcom only and One-Stop. Tesco offers a wide array of food and non-food products including fresh food, beverages, bakery, grocery, home furnishings, baby products, flowers and plants, toys, wine, technology and gaming, sports and leisure, garden, clothing, fuel, household appliances, health and beauty products and consumer electronics and electrical goods.
Jan 2019, Tesco announced about several changes pertaining to restructuring initiatives to its business framework, cutting 9000 jobs on the line. Reduction of counters available in a shop, improving stock control and business simplification are among the several changes, that the company is planning to implement.
: Tesco exhibited a steady revenue growth during the review year and in FY2018, the company generated revenues of GBP57,491 million as compared to GBP55,917 million in FY2017, with an annual growth of 3% over FY2017.
Multi-Format Store Network:
Tesco specializes in retailing with in-store picking model, and online platform. Wide range of store formats helps the company to cater to varying needs of diverse customer base, in turn generating higher revenues. Its retail stores network includes both company-operated and franchised/partnered stores. Tesco has different store formats, each tailored to the customer’s needs in a locality. These include department stores, hypermarkets and supermarkets. In February 2018, Tesco introduced Chef Central concept store at Bar Hill, Cambridge. The company operates a total of 6,966 retails stores of which maximum are company-owned and over 260 as franchise stores.
Inventory Turnover Ratio:
Tesco reported an increase in the inventory turnover ratio during the review year. Improving inventory turnover ratio and lower inventory turnover days signify that the company incurs low inventory carrying costs, which help improve its operating performance. The company's inventory ratio stood at 22.99 times for the last fiscal year. This was above the Retailing industry average inventory turnover ratio of 7.12 times for the same year.
Last year, the company had recalled products for not meeting standards. In January 2018, Tesco under Finest brand recalled its chocolate cakes, due to manufacturing error. Date code of Chocolate cake boxes have been incorrectly packed with carrot cake date code.
Limited liquidity position might put the company at a disadvantage while funding any potential opportunities arising in the market. The company recorded a current ratio of 0.79 times for the last fiscal year. This was lesser than the Retailing industry average current ratio of 1.46. The below average current ratio indicates that the company may find it difficult in fulfilling its pay-out obligations.
Acquisition of Booker Group:
The company intends to expand its business operations and offerings through strategic acquisition. In March 2018, Tesco completed the acquisition of Booker Group Plc (Booker), to build their strength as a food business retailer and wholesaler and plans to increase its growth in the UK food market to become the UK’s leading food business retailer. Booker is a cash and carry operator and a food wholesale distributor based in the UK.
Expanding Retail Market in the UK:
Tesco is a retailer based in the UK and it offers various products such as electrical and lighting accessories, bathroom and kitchen accessories, home security accessories, footwear, work-wear apparels, decorating items and flooring accessories. Growing retail market in the UK could offer it further growth avenues. In FY2018, it opened 24 stores in the UK of which 11 were One stop stores, 11 Tesco Express and two Superstores. It also opened 19 One Stop Franchise stores in the UK.
Strategic agreements help the company to expand its business operations. In July 2018, the company entered into a strategic alliance agreement with Carrefour SA (Carrefour) to offer products at lower prices to customers. Carrefour is a French retailer which operates 12,300 stores across more than 30 countries worldwide. By this agreement, the companies can collectively offer products to serve customers in a better way at an improved choice, quality and value.
Increasing Manpower Costs:
Increasing manpower costs could have a negative effect on the company. In FY2018, the company employed 324,117 people. Further rise in the wages could increase the operating costs of the company. The tight labour markets, government mandated increases in minimum wages and a higher proportion of full-time employees are resulting in an increase in labour costs.
: Competition poses a threat to the company’s existing market share in retail business sector. The major competitive factors, which affect its business include customer service and products, quality and price. Tesco faces tough competition from budget retailers, the premium retailers and online entrants. Its major competitors include ASDA Stores Limited, J Sainsbury plc, Marks and Spencer Group plc, Wm Morrison Supermarkets PLC, Carrefour S.A., Costco Wholesale UK Limited, Lidl UK Ltd. and others.
Key Ratios for Tesco (Source: Thomson Reuters)
LTM* - Last Twelve Months
Looking at the above, it can be construed that the company aims to demonstrate decent fundamentals in the long run as done in the past and is strategizing ahead of the market uncertainty driven by many macro factors.