Tesco: Phase 2 - reset investor expectations

It’s always entertaining to see good people-management at work. As with a new Government, a new management needs to persuade the stakeholders that their predicament is substantially worse than previous team were letting on, but that with a little pain, the new team and plan (usually with a catchy name) will secure recovery by the time their contracts come up for renewal. This however requires a reset (down) in expectations, which usually is accompanied by the obligatory ‘kitchen sink’ job, followed by selected acquisitions with plenty of fair value adjustments that if handled correctly can often be written back to deliver the required ‘recovery’, albeit sometimes to below the original start point.

So far, we have had the ‘predecessor-trashing’ and now with the Dec 9 pre-announcement, we are being softened up for the reset in expectations. Management have given markets just one number (under £1.4bn for FY15 trading profit) and it is a bad one, suggesting a near -75% YoY collapse in H2 FY15. What we are not being permitted to see at this stage are the components of this performance; ie how much from a further deterioration in UK like-for-like sales or whether significant provisions and charges have been levied against this period that may not be recurring. Without these, markets will not be able to gauge properly the depth of the underlying margin trough or the businesses capacity to recover. For this (hopefully), investors will have to still await the planned announcement on the 8 January. By then, investor expectations ought to have tanked and markets will be grateful to suck up any plan that offers recovery even if to a substantially lower margin base than hoped for only a few months previously.