Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 3 October 2014

Supermarket Sweep!

Price war smashing the sector

Golly gosh! What a jolly old time Britain's supermarkets are not having of it.

First there was that irritating global financial crisis 'thingamijig', and then just when the financial world looked like it might not collapse those pesky budget operators from Germany like Lidl and Aldi began carving out tasty chunks of their market share, leaving share prices more pickled than a Sunday Sauerkraut.

Once snobbish British consumers have over time been quietly impressed with the range and quality of the efficient German budget operators. What was once seen as something to turn one's nose up at - shopping at a budget chain - is now more of a badge of common sense. Why spend more than you have to for groceries?

It's sometimes odd what a deep recession can do to a national psyche. British supermarkets have been engaged in something of a turf war, largely based around price, although it's been more than just that, and the big supermarkets are hurting. And how!

How's this for some price action?

Tesco's woes have been well documented after the discovery of a £250 million "black hole" in the accounts - my former employers Deloitte have been sent in so that the "forensics" can kick over the entrails while the Serious Fraud Office (SFO) are waiting in the wings like a coiled spring.

While I of course don't want to get myself in trouble for speaking out of turn, some other people who are not me have opined that the Tesco executives may have been a mite over-zealous in their aggressive or accelerated recognition of commerical revenue and costs with UK suppliers. 

Whether the cock-up was a genuine mistake or something more sinister will come to the fore in due course, but the mere direction of the accounting error leads one to suspect that aggressive accounting policies played a role.

The regulators are crawling all over the Tesco financials and this huge blunder has burned billions of quid off the market cap.

Warren Buffett, who was instrumental in buying 3.7 percent of the company through Berkshire Hathaway, said that his investment in Tesco was a "huge mistake" (well, yup, although hindsight does come with the significant benefit of 20:20 vision) with the retail giant issuing no fewer than three profit warnings in only two months.

After two full decades of ceaseless and unstoppable earnings growth, in just a few short years Tesco's fortunes have become mired in despair. Yesterday the Tesco (TSCO) share price took another 3.4 percent tumble to be off 39 percent in the past year alone and sitting not too comfortably at an 11 year low.

Meanwhile Sainsbury's (SBRY) dived by another 6.6 percent yesterday after it was forced to release a Q2 trading statement which showed that revenues have continued their sorry slide. The share price is off by more than 39 percent in the past 12 months thanks to what it morosely termed "a perfect storm of problems". 

And the equally hapless Morrisons (MRW) took another 5 percent hit yesterday to be off by 42 percent in a year, while news that an executive is to be charged with insider trading will do little to quell the quivering rage of impecunious shareholders.

Tide not yet turned for the sector?

While PE ratios may now be superficially attractive, would-be buyers must remain wary as it is unclear whether trading conditions will soon improve, short sellers are all over these stocks like an irritating rash, and in Tesco's case, analysts will be wary in case of further write-downs resulting from a lack of integrity in the trading figures (or, indeed, other financial data).

It's not a great situation for private investors all round, actually. Why? Because the retailers which are actually thriving - that is to say Aldi, Lidl, and to somewhat lesser extent, Waitrose - are either private businesses or co-operative partnerships and therefore as such are....well, a closed shop!

That the world's greatest investor Warren Buffett can pick a stinker which plummets by 50 percent is one of the best  arguments I've heard in favour of retaining at least some diversified products in your portfolio.

While the FTSE index has been crunched from 6873 to 6446 in just under a month, the index remains up over the past 12 months, albeit only by a slender 1.8 percent.


Disclaimer: These are not stock tips or financial advice. Engage a financial adviser before making investment decisions.