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

16th Jun '17 by Paul Scott

61 comments 21201 reads

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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AnonymousUser41492

16th Jun '17

I really enjoy the macro musings too. Would love to know your feelings on Next - retail, of course, but maybe one that was already planning for tough times and has already taken a hit?

vodathan

IQE (LON:IQE) up 20% since Tuesday on unconfirmed rumours that the new iPhone 8 will use their VCSEL (Vertical Cavity surface-emitting laser) sensing technology (IQE a global leader in this technology).
Peel Hunt upgrade TP to 100p from 62p and forecast mid-case outcome EPS of 6.2p FY2018 up from 3.4p currently forecast. Upper end TP forecast of 185p

I hold.

Lion Tamer

I think Germany & France get good value from funding Greek bail-outs. Without the drag from the poorer EU members, the Euro might be somewhat higher, making exports from better off EU counties such as Germany & France more costly outside the EU. Basically baling-out Greece (with money they get back again anyway in the form of debt repayments) supports their exports. And the bale-out is free to them anyway, since without it Greece would default, meaning the net difference between funding the bale-out or not is more or less zero. I could have it all wrong of course!

For this reason I'm investing on the assumption that the Euro will remain about as stable as it is now.

gsbmba99

Amazon Prime irritates me as well. Unless you agree to pay for Amazon Prime, they delay picking and packing your order for about a week after you place it. Other retailers don't seem to do that.

JohnEustace

I've been boycotting Tesco since they failed to deliver the turkey three Christmases ago and the driver tried to get me to say he had delivered it when all the bags were still in the hallway, clearly without a turkey in sight. (My daughter phoned just after while she was on the Tube - she said the whole carriage gasped when they heard her repeat back what I said had happened!)

But the trickery that they and others use in their pricing irritates me enormously. They are all at it, from M&S with their three for £10 offers that only apply to some of the products on the shelf, to Waitrose where some of their offers only apply if you have their card and go online to select the discount. It turns shopping efficiently into a competition between the customer and the tricky pricing offers.
This is why I find Aldi or Lidl refreshing. I put stuff in the trolley and pay them money for it. Simple.

dscollard

by contrast I use Amazon almost daily, it is typically a 10-20 mile round trip for me to go to shops of any size. I can order before 10pm and have a delivery the next day before noon. Prime means I pay no delivery charge for most items. Amazon Music and Video are a bonus which I rarely use . As one anecdote on Amazon's compelling offering, I needed a spark plug for a chainsaw and happened to be near a B&Q: one spark plug was almost £6 : that is also 18 miles away so a bit of diesel and time as well. As a sidebar, the uninformed and disinterested staff in B&Q were about as useful as a chocolate spark plug.
Meanwhile, on Amazon , 2 spark plugs for £4.50 delivered the next day at no cost. A no brainer

Amazon have the size and scale to out-price and outlast most competition

Meanwhile Tesco (LON:TSCO) has taken the Amzn takeover of Whole Foods well ...that is one price reversal!!

Too much posting on Stocko this afternoon, should have gone to the beach

Triniams

I hold IQE and was wondering why it's gone up so much recently. Where did you see the rumour? Thanks.

Rusty2

Yes I agree, free delivery is very slow, I hardly ever use Amazon now. They also don't pay their fair share of tax, why support these type of companies.

Skelray

Off topic but as we are having a general discussion may I ask a question about 'shorting'.
I believe you have to borrow the stock in order to short it ........my question, do you become the owner of the stock
and if so are you entitled to dividends?

Slightly afraid I've asked a silly question but here goes.....
Skelray

Fegger

I agree this is why John Lewis pointed out that they cant match all their prices -because it isn't a level playing field and the foreign multinational pays no tax.

Is insane that we let a foreign company have a much better chance of succeeding than a British company.

That's where being in Europe could have helped as they are trying to address the issue.

And why I too buy from anyone but Amazon if I can

It's been mentioned here before. I've commented on it but don't remember exactly when. I can see a comment from Jane Bolacha on it back in March that links to a Seeking Alpha article.
http://www.stockopedia.com/content/small-cap-value-report-tue-21-mar-2017-iqe-fevr-scs-ptd-goal-jdg-acso-ubi-biln-176750/?page=1#comments

I expect it's building momentum based on the latest rumours on the iPhone 8 design being consistent with it having 3D sensing included.

I'm an IQE holder but wary of getting too excited because I have a view that the only people who make a lot of money from the Apple supply chain are Apple.

Luthrin

"Amazon have the size and scale to out-price and outlast most competition."

Incumbent retailers should perhaps also be nervous about the checkout-free Amazon Go technology which the company announced late last year. The first trial store opened in Seattle with access for Amazon employees only and there were later reports of teething problems with the product tracking.

These early hiccups don't appear to be deterring Amazon, and Bloomberg reported last month that the UK Intellectual Property Office had approved the company's application to trademark the slogans "No Lines. No Checkout. (No, Seriously.)" and "No Queue. No Checkout. (No, Seriously.)". Also in May the company advertised a new senior real estate post for Amazon Go in the US, with the duties including site selection and lease negotiation.

Whether Amazon will seek to retain this technology for its own competitive advantage or license it to others remains to be seen.

portugull

I cannot wait to read what Paul Scott has to say on Fusionex ( FXI). Absolute scandal.

luckym

From Wikipedia:

"Nevertheless, one main discrepancy in the short against a long position is that the short position must exclude the dividends paid, if any."

See: https://en.wikipedia.org/wiki/Short_(finance)

danielbird193

Paul - I read these articles most days and almost always learn something new from them, but today's mix of UK retail sales, UK politics and Eurozone economics was the most interesting in a while (despite lack of 'small cap value' content!). In fact probably the most enlightening piece of media content I've read in weeks.

I just wanted to say thank you - you should have a column in the Evening Standard!

bwakem

Skelray - the person you borrow from is still the owner and you will have to pay *him* the dividends out of your pocket since neither you or he will receive the money as neither of you are in possession of the shares once you have sold them (to open the short).

investimouse

Did this exact thing yesterday in Tesco. Picked up the loose cherries as loose produce is always cheaper, took it to the weighing machine and almost collapsed at the price. Chucked it back into the box.

Haven't been to Tesco for months - should've known better.

Indeed, incumbent retailers across geographies are taking a hammering with the exception of Ocado (LON:OCDO) and WM Morrison Supermarkets (LON:MRW)
Might be reflecting the investment many of these will need to match Amzn in online fulfilment

Have to question whether J Sainsbury (LON:SBRY) 's acquisition of Argos was well timed given the complexity of integrating into their business systems while being outflanked by Amzn.

I have been serially disappointed with the adoption of in-store technology by our retailers. many self-checkouts are barely fit for purpose ( with the exception of Lidl which I found extremely well designed and advanced). Tesco (LON:TSCO) seem to have only recently rolled-out contactless in their larger store formats. I expect Amzn stores to embrace many of the in-store innovations that have been around for years which will help reduce bugbears like on-shelf-availability , inventory management and visibility and and and. Incumbent retailers with ageing estates and staffing levels may find Amzn stores to be their nemesis.

I take the point from others views that Amazon's aggressive entry to markets make it something of a Borg: it assimilates and destroys.

Will be an interesting sector to watch

Cerrito

I am joining you Paul in going for cash...indeed sold quite a bit before the election and continuing to do so especially with UK centric stocks.; we are in for ugly times not seen since the 70's. I am more relaxed about speculative stocks always provided that they have a good chance of overseas sales.
Whether its Katrina May; failure to reach a deal with DUP; changeover in David Davis' area including resignation of Lord Bridges; kicking deficit reduction in the long grass...I have very small exposure to UK retail, sold down housebuilders and UK property companies.
Bonne chance to all

replied below - seems one can't add a graphic to a reply of a reply

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

Retail sales data

Political upheaval

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Paul Scott

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