Every little hurts? Tesco overvaluation “significant and structural”

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17/04/2015
Margaret Lawson of SVM Growth has warned investors that a future Tesco recovery could be unattainable – and the supermarket almost certainly faces a significant writedown in the months ahead – due to the “significant, structural” overvaluation of its property portfolio.

Three days ago, Tesco shares fell by 2.7 per cent after the retailer announced it may post a writedown of up to £4bn when it publishes results for the year ending February, rather than the £1bn originally stated. Such a writedown would result in a statutory annual loss for the supermarket chain. In all, Tesco shares have fallen by 37 per cent in the past two years. The Financial Times speculates that the Tesco writedown results from the company’s long-term battle with discount chains Aldi and Lidl, but Lawson thinks otherwise.

While saying that new chief executive Dave Lewis “is doing the right things”, Lawson believes that Tesco’s property holdings pose a significant – and potentially insurmountable – risk to the company’s future wellbeing. For the past 20 years, Tesco has based much of its success – and spent significant swathes of its net cashflow – on the purchase of prime land, for the establishment of megastores and large outlets. While the extensive floor space the strategy afforded fed sales growth initially, “the internet – and then the economic crisis – has eroded the premium value of UK retail square footage – and Tesco has not found an effective way to make the space pay.”

“Tesco has tried filling the space with restaurants, cafes, white goods and electricals departments – and none of it has worked. Sooner or later they are going to have to sell the space.”

“Tesco is better positioned to deal with this problem than some rivals are,” Lawson concludes, “but we don’t know whether there will be room in future for even three large supermarkets in the UK –and we don’t know how much of their margin supermarkets will have to give up in order to survive.”

Tesco may well have already begun the process of downsizing its real estate holdings; in January, the supermarket announced the closure of 42 stores, and the abandonment of many key development projects, including the £65m redevelopment of the Wolverhampton Royal Hospital, the £200m redevelopment of Kirkby town centre, and the creation of a retail and housing development in Dartford, Kent after over a decade of planning.

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