Tesco & Dart Group (TSCO, DTG): Keeping up

First of all - I am still here! The eagle-eyed might have noticed that I've been looking for a job^[1] and finishing my exams in the last couple of months, so I took a break from blogging while I threw my attention at both of those endeavours as well as the proliferation of great sport on TV this summer. The assessment is, thankfully, completely finished; the former has been hugely aided by the blog, which has put me in touch with a number of great people (ongoing, I should note!), and the latter has been exceeding even its own high expectations, probably aided by the prompt departure of the England team, who left no lingering hope to be brutally extinguished in the knock-out stages.

I'm left facing a portfolio which I feel slightly out-of touch with, then, but also thoughts and ideas which I have had but haven't blogged about. I'll spend the next few posts rectifying those outstanding matters, then, with a relatively open run around of things I feel like discussing.

Tesco (LON:TSCO)

Don't shoot me for starting with Tesco again. You'd be forgiven - or perhaps spot on - for thinking I have some sort of obsession with the retailing giant. I probably explained it best in my last post on the supermarkets:

I like the supermarkets. I like the supermarkets because they're the best example I can think of of capitalism in action. They're relentlessly profit driven machines in constant competition...

My strong suspicion is that the bearish rhetoric is just wildly overdone, both among the financial types and among the public. Aldi and Lidl have done a great job of persuading the public they're offering a whole new deal - I remember reading a BBC News article about Lidl where the comments were almost entirely singing the praises of the Germans and denouncing Tesco. Aldi and Lidl have 'incredibly efficient checkout people' and 'interesting ranges', they noted, two things I entirely agree with. They're also two things which could quite easily be rephrased as having your checkout person throw food at you like a industrial wood chipper and ranges which feel like you can never really know what you'll end up with.

Perhaps I'm just revealing my own biases, but I think news stories are self-fulfilling prophecies (there's a downward spiral of negativity and positivity in many human activities). I think Tesco still have a dominant logistical and competitive position regardless of errors in strategy, which can be rectified and have happened to and fro since the start of the modern supermarket era. They're still well placed to sort themselves out and deliver a bunch of synergistic services, they've got the biggest edge in convenience stores and their international operations still look good to me.

I've had a few emails from people vociferously disagreeing with me. Supermarkets seem to uniquely evoke passions, perhaps because we all use them and have our opinions on them!

I also note their push into current accounts with banking, which seem to me to be exactly what they should be doing. This is how you leverage customer data and having an enormous customer base, and it's made even more opportune by the current mistrust and dislike of the big banks, as well as the Government's ongoing drive to get people to switch more current accounts. I'd like to do more research into this re: what having current accounts actually means for the organisation as a whole. Is the capital in the bank segment segregated, for instance? Is the bank allowed to use deposits to buy group debt? That sounds a bit cyclically bizarre, but hopefully it raises the point that there might be some benefit with regard to group financing and not just operationally. Someone more knowledgeable than me has doubtless written about it.

Dart (LON:DTG)

I was surprised by the precipitous decline in Dart's share price after the of their preliminary results^[2] last week; the shares had already sunk to 250p from 300p, and fell another 24% to 190p before bouncing up to where they're currently trading, at more or less 210p a share.  The company reported net profit of £35.9m (though perhaps one should take the reported profit figure with a pinch of salt for a company with as many 'nudgable' variables as this) which, against the current market cap of £303m, seems rather low given that the company has been experiencing extremely strong growth. Obviously they have been doing something right.

The fear, as usual, seems to radiate outwards from the outlook statement, where Dart say the following:

In relation to the current financial year, we are finding demand for leisure travel, this summer, to the markets we serve, less buoyant than we would have hoped for and market pricing weak.  This may be due to the weather, the World Cup, or because the financial recovery hasn't yet taken hold in our home territory, the North of the UK.

Which, granted, sounds like pretty limp reasoning to me. Also as usual, the company rounds off by saying they expect operating profit to be 'below market expectations' without saying what they think those market expectations are or by how much they expect to underperform them. Should you be irritated by that? Part of me feels that, particularly this far in advance, results will be noisy, so forward looking statements are of little interest anyway - perhaps mitigated by a business model which obviously relies on forward bookings in certain key seasons. Maybe I shouldn't care.

Even with that, though, I can't help but feel that if you're going to make a statement on expectations, don't make it as vague as this. Maybe I'm starting to sound like a broken record on this, too, but read a Howden Joinery Group statement, and you'll see:

As a result of this, we now expect profit before tax for the year to be around the upper end of the range of market expectations (Note 1)
Note 1: The range of analyst expectations for profit before tax and exceptional items from continuing operations for 2013 is believed to be £122m to £134m.

Make a statement, give an opinion, define the parameters of that opinion for the avoidance of doubt. Anyway, back to Dart - maybe we're just seeing what we'd expect, which is that a historically overperforming business in a relatively commoditised industry is coming back down to earth a touch. When I look in more detail, of particular interest will be the breakdown between the airline segment and the package holiday segment; the latter clearly offers more potential for adding value, particularly when you're cross-selling with the flights.

Back on the analysis list, then, along with Flybe, who piqued my interest with their lofty valuation (something of a Dart-esque run-up..) after an apparent change of management/strategy. Looking at both should inform my judgement a little more.

References

1. ^{^}looking for a job (expectingvalue.com)
2. ^{^}preliminary results (www.dartgroup.co.uk)