Zak Mir on Tesco’s Permanent Trolley Wobble

As many observers of the financial markets will know, there is nothing quite so easy in terms of financial journalism to get readers interested than to discuss the plight of the supermarkets in general, and Tesco (TSCO) in particular.  Somehow it is the case that rain or shine, private investor or hedge fund guru, we are always keen to listen.

This state of affairs was in place even before the wobbly trolley wheel acquired on the fundamental front by the supermarket giant almost exactly three years ago, when it announced its first major profits warning. That situation was supposed to have been resolved by a £1 billion spending spree announced later that year by the retailing giant. Unfortunately, the negative newsflow and the profits warnings have if anything become progressively worse.

But you did not have to be an expert on the sector to realise the adverse consequences of a group which was attempting to spend its way out of trouble. Since then of course we have been treated to other nasties such as the revelation that the world’s greatest investor, Warren Buffett,  confessed that being involved in Tesco was a huge mistake, with the final kick coming from a downgrade to junk status for its debt by Moody’s this week.

In fact, these latter two factors, along with the accounting issues revealed late last year, may be the low point (finally) on a fundamental front for this company. For instance, Buffett is a giant, but not the king of timing, and credit agencies such as Moody’s rated the debt triple A just before the crash, and junk just before the dawn.

However, the issue of long term structural decline will still not go away for Tesco.

While the shares rallied quite spectacularly last week, our friends in the financial press did not emphasise enough that this was probably a relief rally on the basis that the feared a rights issue did not materialise. Unfortunately, it may be that CEO Dave “Drastic” Lewis in not going for the cash call missed the last great opportunity to turn Tesco around in a non-painful way. Of course, the Moody’s downgrade effectively hamstrung such an idea, but the situation here may require more than just flogging non-domestic assets in the Far East.

Instead,  not opening new stores and closing others may appear to be welcome as part of a new strategy at first glance. Unfortunately, the lasting impression given here is that without a rights issue anything else is simply rearranging the deck chairs. True, Mr Lewis has done everything you are supposed to do in the CEO / MBA handbook in terms of doing and being seen to do the right thing in his first 100 days on the job, from asking those at the tills what they would like to see on strategy, to offering others bitter pills to swallow and swords to fall on. The problem is the momentum here appears to be too strong on the downside, even with a better “Black Friday” contribution in the latest sales figures.

From a technical perspective the gap to the upside last week through 200p is clearly a near-term positive, catching the perma bears off guard as it did. Nevertheless, we really need to see a break back above the floor of September gap to the downside at 214p to give the daily chart a bona fide bullish aspect. Back below the former November resistance to £1.97 is all the bears require to resume the three-year breakdown for the shares.