Analysts are a fickle bunch. Not one month after lambasting Tesco over the decision not to disclose results for the firm’s US venture independently, Tesco is today being toasted for Fresh & Easy’s tremendous launch.
A note from Execution describes Fresh & Easy, Tesco’s answer to Wal-Mart in the States, as "the new cult retailer" going on to say, "at the risk of doing the job of Tesco's public relations department, F&E is already an incredible success story."
The comment comes from research based on interviews with customers in Los Angeles, Las Vegas and Phoenix and came back highly positive. The venture - which Tesco is spending £250m a year on - was roundly panned in April as Tesco took the decision not to disclose Fresh & Easy’s progress. Top-rated analyst with Citigroup James Anstead called the move "rather disappointing," and further planted the seeds of doubt adding "it would not be surprising for cynics to use this as evidence that management is disappointed by early results." Piper Jaffray added that it believed some stores were 70% below target.
I wrote at the time that this was a strange over-reaction to such a minor event and so it has proven.
Tesco retorted with an expectation-busting 12% jump in pre-tax profits to £2.8 billion. In yesterday’s Fleet Street Research, I noted that Marks & Spencer is similarly under the cosh from institutional investor groups... It’s no surprise that Tesco took a defensive turn, withholding the figures, analysts have been pretty bloody-minded of late.
F&E is surely off the broker hit-list now however, Execution reports that the venture was well received by shoppers, scoring higher than established players Trader Joe’s and Whole Foods on quality of produce and even trumped Wal-Mart of value for money - a potentially big win.
Furthermore, nine-out-ten cats would "highly recommend" the store to friends and family, the highest score of all brands evaluated by Execution. "We estimate that within five years Fresh & Easy will makes sales of $12 billion," said Execution. F&E are one to watch... Set to launch their 62nd store, from an original base of 50 and adding 250 new items to the shelves in the next three months.
Tesco outpacing the sector
As I’ve said before, there are good reasons to be bearish on retail. The high street has come under a real squeeze and underperformed the wider stock market, which itself hasn’t been great. It isn’t fair however, to be hyper-critical and suggest strategic shortcomings — see Marks & Spencer yesterday — when the real engineer of the downturn is the performance of the UK economy. However, what is even worse than unfairly criticizing retail groups for their underperformance is to criticize retail groups for their out-performance!
Not only has Tesco returned more than doubled its share price in the last few years, it has been a powerhouse through the credit crunch. It’s most recent release showed UK sales up 6.7% to £37.9 billion. Double digit sales growth was driven by international growth, including a £702m contribution from China, which was consolidated in the accounts for the first time.
Tesco’s resilience in the domestic market is partly to do with petrol. Even though the typical consumer is tightening their belt, fuel is an essential... Stripping fuel from UK growth puts it down to 3.5%.
Go East
The British Retail Consortium recently revealed the first drop in like-for-like sales and is forecast to show similar figures this month. What Tesco has crystallised is the formula that all successful stocks have done in this market. They have de-coupled their balance sheet from the domestic market and look all the better for it.
Megacaps, like Tesco, operate in so many regions that it is perpetually hedging its bets. When one market is in decline another will be prospering. This is relatively safe playing in such a fatalistic market place. And it’s not just Tesco. There are more than 20 firms valued over £25bn in the index, many of whom conduct most of their business abroad in what is a tough time for the domestic economy. Remember, that the UK economy and the UK stock market are not the same thing.
Take Rio Tinto as a case in point. An Australian mining firm with interests all over the world... Why would they care if the British consumer is spending slightly less o the high street? They don’t, and more importantly it doesn’t impact their bottom line.
The UK stock market is rich with the world’s best multi-national companies. Frailties in the UK don’t rock their bottom line. This is why savvy stock pickers need to think global and take advantage of the real growth foreign markets, the FTSE 350 is a window on the world, full of opportunity and right now The Fleet Street Letter has three plays that will save you from our tired economy.
Theo Casey
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