Small Cap Value Report (Fri 16 Jun 2017) - TSCO

Friday, Jun 16 2017 by

Good morning!

I'm keeping a very close eye on announcements from retailers, after recent concerning economic data, and the profit warning from DFS yesterday.

Tesco (LON:TSCO) put out its Q1 (Mar-May 2017 inclusive) trading update today, which was surprisingly good. Its UK LFL sales performance rose to +2.3% in Q1, which was stronger than any quarter last year. So that seems to have placated the market, which had yesterday sold off retailer & hospitality stocks quite sharply.

Retail sales data

I was rummaging through the ONS report, released yesterday, on retail sales, which is here.

The headline bullet points in the report sound alarming, and triggered a sell-off yesterday;


This seems to have triggered journalists & commentators to produce headlines about retail sales plunging, and worst growth in 4 years. However, on closer inspection, this data is talking about sales volumes. Yet the overall value of sales is rising much more strongly, because prices have gone up (see the last bullet point). Obviously, volume * price = value.

Therefore, to have any sales volume rise at all, when prices are up 2.8% Y-on-Y, actually isn't bad at all. So I am wondering whether yesterday's panic might have been a bit of a red herring? Tesco's reassuring update today seems to confirm that things may not be bad, after all?

Here's the table showing that retail sales (amount spent) in May 2017 was actually up 4.1% on May 2016. That doesn't sound too shabby to me:


However, these updates (ONS, and Tesco) only go to the end of May 2017.

Also, retailers are facing serious cost headwinds, and I doubt many are likely to generate enough LFL sales growth to absorb cost pressures next year & beyond, let alone this year.

Political upheaval

The problem is that all the UK political upheaval started on 8 June, with the hung parliament. Therefore we might well see a plunge in consumer confidence & spending this time next month, when the June figures are announced.

Mind you, when the Brexit vote happened, consumers seemed to shrug it off quickly. So who knows what might happen this time? Higher inflation is curtailing disposable income now though.

Another election could…

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Tesco PLC (Tesco) is a retail company. The Company is engaged in the business of Retailing and associated activities (Retail) and Retail banking and insurance services. The Company's segments include UK & ROI, which includes the United Kingdom and Republic of Ireland; International, which includes Czech Republic, Hungary, Poland, Slovakia, Malaysia and Thailand, and Tesco Bank, which includes retail banking and insurance services through Tesco Bank in the United Kingdom. The Company's businesses include Tesco UK, Tesco in India, Tesco Malaysia, Tesco Lotus, Tesco Czech Republic, Tesco Hungary, Tesco Ireland, Tesco Poland, Tesco Slovakia, Tesco in China, Tesco Bank and dunnhumby. The Company's brands include Finest, Everyday Value, Chokablok and Technika. Finest and Everyday Value are the two food brands in the United Kingdom. The Company offers a range of personal banking products, principally mortgages, credit cards, personal loans and savings. more »

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SThree plc is an international staffing company, which provides specialist recruitment services in the science, technology, engineering and mathematics (STEM) industries. The Company provides permanent and contract staff to sectors, including information and communication technology (ICT), banking and finance, life sciences, engineering and energy. The Company's segments include the United Kingdom & Ireland (UK&I), Continental Europe, the USA, and Asia Pacific & Middle East (APAC & ME). The Company's recruitment brands include Computer Futures, Progressive Recruitment, Huxley and Real Staffing. The Company's other brands include Global Enterprise Partners, Hyden, JP Gray, Madison Black, Newington International and Orgtel. The Company delivers contract, permanent, projects, retained and executive search recruitment solutions. Its support and mobility services offer contracting, relocation and relevant visa support. It provides resources to support its brands with contractor services. more »

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  Is Tesco fundamentally strong or weak? Find out More »

61 Comments on this Article show/hide all

Bonitabeach 16th Jun 42 of 61

In reply to Fegger, post #31

Wise up Fegger - Juncker is in Amazon's pocket.

Juncker Blocked EU Curbs on Tax Avoidance


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Funderstruck 16th Jun 43 of 61

In reply to purpleski, post #5

Yes I do; The Brussels elite turned a blind eye to the state of the Greek economy as they desired the power & control over an increasing number of Countries they could enrol into the union. A lot more to add but this is a small co's blog.

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shine66 16th Jun 44 of 61

Presumably the £100 bn we will end up paying for leaving the EU will be laundered through Greece into the German and French banks.

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Funderstruck 16th Jun 45 of 61

In reply to dscollard, post #27

When amazon have created a big enough Mote, they will start to crank up the prices.

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jonthetourist 16th Jun 46 of 61

In reply to Fegger, post #31

I believe Amazon make no profit, as a point of principle, and that is why they pay no tax.

Nor incidentally have their shareholders ever seen a dividend.

But if they did make a profit they would use Herr Juncker's in-EU tax haven of Luxembourg for their corp headquarters, so Europe addressing the issue is a bit of a fantasy, I'm afraid.


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Paul Scott 17th Jun 47 of 61

In reply to tony mchale, post #34

I've already written about Fusionex International (LON:FXI) - it's a rip-off. The shares are worth nothing.


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Paul Scott 17th Jun 48 of 61

In reply to dscollard, post #39

Hi dscollard,

I totally agree re the pathetic IT at conventional retailers.

I have recently moved house, so now use ASDA, and generally like it - huge shop, lots of choice, keen prices.

However, their IT is a COMPLETE JOKE!
It cannot cope with own bags, and on average I have to get human intervention at least 3 times for each visit, to over-ride the pathetic tills. What a joke! ASDA is owned by Wal Mart apparently.

I can see why Amazon are going for grocers - as they're inefficient ####wits!

Another anecdotal story - I bought some new furniture from John Lewis recently. The delivery men kindly carried the boxes into my living room. They did a double-take at my life-sized cardboard cut-out of Maggie Thatcher (everyone comments, and it amuses me).

Keen to not offend me, the J Lewis gent paused, looked at Maggie, and said to me, "We could do with her to manage our warehouse! If you saw it, you'd know why!!!"

We had a great laugh, and that was that.

Cheese, Paul./

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cig 17th Jun 49 of 61

In reply to CliveBorg, post #19

Just guessing here, but if I was looking for a stock to play a pump and dump on, Zanaga Iron Ore (LON:ZIOC) would be a prime candidate... (sterling speculative credentials, likely reserve of watchers who will be keen on reacting to any price movement, almost no trades, ...)

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TangoDoc 17th Jun 50 of 61

Interesting article, particularly because it seems to beautifully encapsulate the weird state we appear to find ourselves in at the moment. There is so much uncertainty, it is hard to crystallise enough conviction about any new stock to buy and all my personal screens are empty or contain companies I quickly reject. I can't tell how many times I have toyed with Tesco and shied away on gut feeling alone.

I'm not sure I worry that much about the politics, other than its tendency to influence the market disproportionately. How many times have we seen the value of a share plunge following an announcement of a policy that never actually materialised?

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peterthegreat 17th Jun 51 of 61

Paul's comments about retail sales and uncertainties caused by political upheaval/Brexit in the UK are timely and useful but I would also make the point that retailers are also under huge pressure in the US where these factors are absent (unless you think Trump will be impeached!). I think the well known impact of the internet and internet companies in intensifying competition is not only continuing but may actually be increasing and perhaps this is threatening the very fundamentals of the retail business model (unless you are Amazon).

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kenobi 17th Jun 52 of 61

Interesting that after many tough years, Tesco finally starts to turn it around, and frankly put out really good lfl figures, in a very tough market, and Amazon chooses the same day to announce their purchase of whole foods, and the price tumbles ! just shows you can do as good a job as you like, and the price can still fall due to news and other factors !
Mind you Tesco have proved the cynics wrong before, I recall being told by a US friend how walmart (when they took over asda), would see off Tesco and the other supermarkets in the UK, not really worked out like that at all !


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paraic84 17th Jun 53 of 61

Paul I just want to add my thanks to your comments about the wider macro picture and how other bellweather companies are performing. I don't have time to monitor what's happening with Tesco (LON:TSCO) etc so I find your commentary invaluable to help inform my decision-making.

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Triniams 18th Jun 54 of 61

In reply to JohnEustace, post #32

Thanks. I tend to agree that they might well not make money from Apple but I can see the price going higher regardless. Anything connected to Apple seems to get a sky high rating.

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LongbeardRanger 19th Jun 55 of 61

In reply to Triniams, post #54

Although not, ironically, AAPL itself - it's on a rating of 14x free cash flow. That rating does seem to imply a degree of scepticism about its prospects, as the other big tech stocks are all on much higher ratings.

Not sure that's warranted myself, as AAPL clearly seems to be a better and more predictable business than, say, Netflix.

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CliveBorg 19th Jun 56 of 61

In reply to cig, post #49

Thanks Cig, your comment on no trades was insightful.

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ridavies 19th Jun 57 of 61

An anecdotal comment on Tesco (LON:TSCO). I live in the Isle of Man. We have one Tesco, and the local market has 7 branches of a local independent supermarket group, Shoprite. They have deals with Waitrose for a range of their products. They have just introduced a process of in store comparisons - price check with Tesco. Tesco charge the same prices in the IOM as they do in the UK (yes, the IOM n the UK, but that is for a longer article and you can always look it up on Google). I guess they balance the extra transport costs of servicing the large store with the zero profits they pay on their profits on the IOM.
Interestingly, there are literally hundreds of products where Shoprite is cheaper than Tesco. I shop in Tesco on odd occasions - it is 20 miles away - and selectively. It seems to me that Tesco is nowhere near so inexpensive as it used to be. They use promotions well but I wonder if they are as good value as they used to be, or taking more out of the market. They do of course at the checkout provide a comparison of your purchases with the key supermarkets they consider competition, so perhaps Shoprite is just very good value after all! The footfall seems to be very good, which backs up the LFL growth figures they report.
Just a few thoughst!

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ridavies 19th Jun 58 of 61

In reply to ridavies, post #57

PS I meant to say the Isle of Man is NOT in the UK. Do your own research if interested. It is a Crown dependency and has a tariff arrangement with the UK and through the UK with the EU. Unlike Jersey and Guernsey, it also has a common VT agreement with the UK, but has its own tax systems and a high degree of independence.

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vodathan 19th Jun 59 of 61

In reply to Triniams, post #28

I saw it on ADVFN and got hold of the Peel Hunt report.

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ridavies 19th Jun 60 of 61

In reply to ridavies, post #58

Must try harder with my comments! Read them through more thoroughly before I submit them! Sorry.
1. Tesco (LON:TSCO) dont pay any profits TAX in the UK. We have a zero/10 policy here. Zero profits tax for retailers / 10% tax for banks/insurers etc
2. When I referred to footfall at the end of the original comments, that was still referring to Tesco. Their footfall seems to be holding up.
3. Shoprite have deals with Waitrose, but they represent only a small though increasing part of the product range. They also focus on locally produced products = bread, meats, eggs and veg - whereas other retailers - Tesco, Coop and Spar - have only a limited local range.

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tony mchale 19th Jun 61 of 61

In reply to Paul Scott, post #47

Paul I am a bit confused. On Friday you said you were going to do a piece on Fusionex which I sold on 30th May for 46p with a loss of £5k.
Today you said you did not manage to complete Fridays Report which is fair enough but where do I find what you did say about FXI? I have checked recent reports as I was away for a week.
I bought FXI on 9 Nov 2016 at 179p. Ouch!
I greatly value your excellent Reports which form an important part of my Stockopedia subscription.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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