Buy This UK Stock on the Dip?

06/14/2013 7:45 am EST

Focus: GLOBAL

Shoppers have fallen out of love with this London-traded consumer powerhouse, and Harvey Jones of The Motley Fool UK asks whether investors should stay faithful.

"When sorrows come, they come not single spies, but in battalions," Hamlet moaned. Philip Clarke, chief executive at Tesco (TESO), would surely sympathize.

His sorrows are legion right now, following last year's profit warning and share price plunge, the horsemeat scandal, the £1 billion ($1.52 billion) Fresh & Easy debacle, and now falling sales both at home and abroad.

Tesco's interim first-quarter results knocked 5% off its share price, after revealing a 1% fall in like-for-like UK sales, excluding VAT and petrol, and a 3.8% drop in Asia. So, Tesco is cheaper than it was. Does that make it a buy?

No doubt about it, Tesco has lost its mojo. That 0.5% rise in sales at the start of the year wasn't the start of a full-blown recovery after all. Latest figures show a fall in sales for non-food items, such as TVs and electronics, which people buy cheaper at Amazon (AMZN).

Clarke has now pulled out of electronics altogether, in favor of food and clothing, while trying to divert some of the flak by blaming Amazon's unfair tax advantages. He may have a point, but it doesn't really help.

I'm less convinced by his attempt to blame slow food sales on "equine DNA," because Tesco wasn't the only retailer with horsemeat on the menu. Tesco has lost its mask of invincibility. Investors are openly pining for Sir Terry Leahy.

Tired & Tricky
Clarke is starting to look like an unlucky general. The sharp fall in Asia sales, for instance, was largely due to new government restrictions on Sunday opening hours in South Korea.

But that still worries me, because almost every other FTSE-100 company I have looked at lately is enjoying its fastest sales growth in emerging markets. Tesco has stopped growing in nine of its 11 global markets, with only Malaysia and Hungary posting gains, which suggests Fresh & Easy may not be the only rotten apple.

Invesco-Perpetual's dividend demon, Neil Woodford, sold his shares a year ago. Clearly, he saw this coming.

At least Tesco knows it's in trouble. A trip to Tesco turned into an exercise in cut-price misery, leaving customers feeling they have been told to BOGOF. It is trying to turn that around by introducing family-friendly Giraffe restaurants and faux-artisan Harris & Hoole coffee shops into its stores.

It might work, but only if Tesco can make them attractive destinations in their own right, rather than a bolt-on extension to their big sheds, staffed by trademark surly staff.

Frozen Out
Diehard Tesco fans will point to rising food sales (except frozen and chilled convenience), a growing online grocery business, and its plan to freshen up its stores, which is ahead of schedule.

The supermarket's strategy, called "Building a Better Tesco" in the UK, is said to be "improving customer perceptions." Total sales did grow 1.1%, despite tough trading conditions.

Few shoppers can resist a bargain, and Tesco is now trading at 9.6 times earnings, against 12.6 for the FTSE-100. Its yield has risen to 4.3%, covered 2.4 times, against 3.6% for the index. That does look tempting.

But with forecast earnings per share growth of -8% to February 2014, its troubles are far from over. Tesco is still the UK's largest supermarket, but a global behemoth it is not.

I hold this stock, and I'm still holding. But I'm struggling to convince myself it's a buy.

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