Tesco moves to stage 2 of its 'recovery'

UK supermarkets are a bit like the beer they used to sell; bland and too many of them. Tesco however is working on that one as it culls its less profitable sites and brands (including the #4 UK brand, Carlsberg) to restore its growth and margin metrics, even it means from a lower base of revenues and margins. Tesco's interim results released yesterday therefore reflect this dynamic of what was a slight deterioration in actual UK sales growth in Q2 to -0.9% YoY vs the -0.4% posted for Q1, but having eliminated the weaker perfomers from the average meant that the Q2 like for like sales in the UK surged from -1.3% to -1.0%, to take the first half average to -1.1%. While a considerable improvement on the prior trajectory, it was not without cost, with UK & RoI operating profits collapsing by 69% (-£377m) to only £166m and a margin down -200bps to only 0.9%. Given the profit decline of -£377m substantially exceeded the underlying revenue decline of -£226m and that the group had taken around £6.8bn of provisions last year to help pad out the bottom line this is a pretty remarkable performance. Either management is keeping its powder dry for the great cost led margin rebound just ahead of their option vestings in 2-3 year time or the apparent stabilisation in top line sales was expensively purchased out of gross margins.  While this may keep some pressure off the new management, this is no substitute for a sustainable recovery, particularly when the share price is still reaching out to well above even where consensus forecasts are anticipating in FY17.

With underlying organic sales growth still negative and the shares trading on a current year prospective operating FCF yield of possibly under 3% markets are clearly reaching out into a future where a restoration in operating margins and possibly also near market average growth rating may also be in prospect. If one were to take a fairy upbeat assessment that the group ought to be able to justify an underlying growth rating of around +4% pa (and circa 7% Op FCF yield), then we estimate that the group needs to convince markets of its capacity to restore operating margins to near peak levels of around 5%, or to over +50% above where consensus estimates are currently for FY17. We may be through the trough, but is the pace of improvement currently being delivered by either Tesco or its competitors really enough to take us to these valuation highlands within a credible investment horizon? At this stage, the group needs to a capacity for some serious over-delivery rather than merely tracking existing expectations.

A serious over-delivery against current consensus out to 2017-18 will still be needed

du Pont - So bad its good!

Guidance slashed and CEO dumped. Shares bounce however on appointment of break-up artist and more layoffs.

Up until today (6 Oct 2015) the narrative of a weakening underlying performance from macro and fx headwinds (particularly around Brazil and Agriculture) was trumping the speculative aspirations of activist shareholders such as Peltz and an EPS guidance that was increasingly reliant on share buybacks and lower tax provisioning. With the sudden ‘retirement’ (firing) of CEO Ellen Kullman accompanying a further trimming of current year earnings expectations however the narrative is shifting. Now bad is good; a bit like the macro relationship markets have with the Fed. It is not so much due to the announcement of the acceleration and extension of the existing cost reduction programme, but the appointment of Edward Breen, an existing Du Pont board member, as interim Chairman and CEO, ahead of the proposed search and appointment of a full-time replacement. Mr Breen of course was the CEO of TYCO who oversaw its three way split back in 2012 and for those who managed to get out of the shares before 2014 will have very happy memories of the subsequent share price outperformance under his watch. TYCO’s more recent performance however also serves as a reminder that you that repackaging the pieces is not a real substitute for real organic growth any more than a series of debilitating layoffs (ask HP shareholders!).

Markets like the idea of Edward Breen's appoinment who was CEO at TYCO and over-saw its three way breakup at end 2012. The shares performed strongly, although only for a subsequent 18 months and the shares relative to the S&P are pretty much back where they started. Breakups are often better in the telling than the realisations!

Run with the breakup story but know when to cut and run!

Has MailOnline discovered irony or was it just a cock-up?

Perhaps the successful Mail Online should stick to celebrity gossip as its foray into serious issues seems prone to schlock.
While lacking the pithy wit of a News of the World headline, the Mail Online’s recent article on China’s alleged mistreatment of Falun Gong certainly pulled few punches with its title:
“Thousands of religious prisoners in China had their livers, kidneys and corneas ripped out while they were ALIVE to sell to ‘transplant tourists’, claims new film”
http://www.dailymail.co.uk/news/article-3257383/Thousands-religious-prisoners-China-livers-kidneys-corneas-ripped-ALIVE-sell-transplant-tourists-claims-new-film.html#ixzz3nUwZKrMT
On first reading, the article seemed be a one-side puff piece promoting and anti-Chinese film with its “most compelling testimony” coming from a doctor, who just happens to be a Uyghur. Was there no balance to be had? Are the Chinese authorities that evil and when is the computer game out?

But “STOP THE PRESS!”
….the article does have balance, although you have to be able to read Chinese to get it.
In one of its pictures (below) the articles shows the groundswell of support for Falun Gung in Hong Kong from some clearly hardened radicals – well mainly little old ladies. Read what is actually written on the banners however and you’ll see that they are saying quite the opposite to what the Mail Online’s caption purports. Far from them “appealing for recognition for the Falun Gong’s plight” as claimed by the article, the banners are actually urging people to distance themselves from the evil religion of Fallun Gong (the black script) with the scripts in red making various complaints against the sect including accusing it of attacking China and attempting to de-stabilise Hong Kong by aligning it with foreign powers.

It’s okay, Gwailo’s can’t read chinese!

Somehow, I don’t see the Mail Online as being big on irony so either this was a simple cock-up by the picture editor who can’t read Chinese and the editor who didn’t think to check ( – come on Chinese is not exactly a minority language) or was selected by someone who knew exactly what is being said on the banners in the picture and maybe disagreed with the political narrative of the article.

Either way it’s all rather reminiscent of when the media was showing us fake pictures of Russian tanks supposedly invading Ukraine when in fact they were stock photos taken in Chechnya a few years before.
Well done guys, best stick to articles about the size of Kardashian’s booty.

Making the evidence fit the narrative