Credit rating agencies are lining up to junk Tesco after an abysmal year.
The UK supermarket competes with France’s Carrefour for the title of world’s second-largest retailer.
Moody’s downgraded Tesco’s credit rating to junk last week. Standard & Poor’s follows today, with this pretty brutal assessment of the British retailer’s prospects:
Given the structural changes and competitive pressures that Tesco is facing in the U.K. market, the credit supportive financial policy measures announced by Tesco’s management are unlikely to sufficiently improve the group’s financial risk profile to maintain an investment-grade rating.
Those “competitive pressures” come in the form of two German insurgents: Aldi and Lidl, the discounters that are making major inroads into the UK retail market.
In 2014, the firms raised their Christmas sales by 22% and 15%, respectively, at a time when every established British supermarket took a hit.
Meanwhile, Tesco efforts to cut costs in 2015 (it scrapped its dividend for shareholders, announced a freeze on payroll investment, is closing dozens of unprofitable stores, and is stalling its expansion plans) is still not enough for S&P:
In our view, the dividend cancellation, cuts to future capital expenditure, and potential disposal of the dunnhumby business, if achieved, should enable Tesco to improve its cash position by more than £3 billion over the next financial year ending 2016. At the same time, however, we expect market conditions to remain highly competitive for retailers, particularly in the U.K., which accounts for about two-thirds of Tesco’s retail sales and profits. We anticipate that increased competitive and price pressures in the U.K. from both traditional and discount retailers could suppress any benefits from various management strategies oriented toward improving trading performance.
Tesco was forced into the embarrassing position last year of restating its profits, admitting a £250 million overestimation. The company was already finding it difficult to hold its share of the retail market, and combined with the announcement, which included the suspension of several senior executives, its shares fell by about half in value in 2014.
That said, investors seem to have responded more positively to Tesco’s turnaround plan than credit rating agencies, and the share price has risen by nearly a fifth since it announced the major cutbacks earlier this month.
It’s up by about 2% today. That still leaves it far, far below where it was even in the middle of last year.