Ardevora partner Jeremy Lang says supermarket Tesco will continue to be held back following today’s profit warning by its large-scale legacy store base and old business model, while discount and convenience stores are set to flourish.
Tesco cut its full year profit forecast from £2.8bn to £2.4bn today and slashed its half-year dividend by 75 per cent to 1.16p per share from last year amidst what it described as “challenging market conditions”.
Early trading on Friday saw Tesco shares fall as much as 8 per cent to 226.70p. The stock has since recovered slightly to 231.30p as at 10.15 am GMT.
Lang has been negative on established supermarket chains for some time now arguing that the size and scope of products on offer at existing stores actually leaves these businesses “lacking in most areas”.
“The fundamental problem for the likes of Tesco and Morrisons is that their stores are the wrong size,” he says.
Lang continues: “The issue for Tesco, as well as similar chains, is it tries to do everything: cheap food, expensive food, clothes, toys – but ends up lacking in most areas.”
By contrast Lang currently favours the opportunities available from the trend toward convenience and discount stores. He adds: “If you look where the growth is coming from, it is not in the big stores – it is from convenience stores, discount shops or online outlets.”
Tesco in particular could struggle to make the necessary changes to its business model with Lang warning that the company management “significantly underestimates the market’s structural evolution”.
He says: “The idea it can easily adapt its existing store base is mistaken – we believe it is wedded to its previous business model. While this was extremely profitable in the past, the world is changing.
“Essentially, Tesco has been left with a legacy store base, which does not make sense given the new trends in the market. Our interpretation of how management is behaving, by dissecting the balance sheet and investment decisions, is that it the company significantly underestimates the market’s structural evolution.”