Tesco (LSE:TSCO, Financial)(OTCPK:TSCDY, Financial), a company Warren Buffett (Trades, Portfolio) sold last year and called “a mistake,” on Tuesday reported improved financial results portending a possible recovery after several disappointing quarters. Did he make a mistake selling too soon?
Buffett spent $1.34 billion starting a 2.9% stake in Tesco of 229,707,000 shares in 2006. His cost on average was $17.50 per ADR. As the stock then surged his profit soared to 62% by 2007, before the price tumbled in the financial crisis of 2008. He still liked the company the next time it fell below his purchase price, increasing his holding to 415,510,889 shares or 5.2% of its outstanding stock in 2012, a $2.3 billion investment. But Tesco started to slump in 2014 and touched new five-year lows in 2016. Buffett dumped his whole stake in 2014.
“An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling,” Buffett said in that year’s shareholder letter.
Tesco’s share price fell over recent years as some of its financial metrics deteriorated. Sales declined in 2013 and shrank in each quarter since mid-2014 as it gave up market shares to competitors. The UK’s biggest grocer also saw its net margins and return on equity decline annually since 2013.
Data released Tuesday suggests that Tesco could be stemming its negative trends. Tesco’s overall sales for the 12 weeks ended Feb. 28 declined 0.8%, half of its 1.6% sales decline in the previous period, according to research firm Kantar Worldpanel.
“A renewed focus on price promotions has helped stem the flow of shoppers leaving the retailer despite the closure of around 50 stores in the last year,” Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel, said.
Tesco’s improvement comes as supermarket sales rose 0.5% for the period, their greatest increase in five months.
“This is the fastest rate of growth since October 2015 but is still being held back by the ongoing price war and falling grocery prices, which are down by 1.6% – a continuous decline which began in September 2014,” McKevitt said.
The data showed that more customers visited a lower-priced competitor, trouncing Tesco’s growth rates and the total average. Co-operative Aldi and Lidl’s combined market share grew to 10.0% due to an increase in shopper frequency, up from 8.4% a year earlier.
Tesco also gained back some ground as its market share grew to 28.4% for the period, down from 29% a year earlier but up from its 27.9% trough in November. It has not regained its full one-third control of the UK grocery market it held in 2013.
But Buffett’s primary problem with the company lay primarily in its management. That was about the time Buffett sold 144 million shares of Tesco, saying he “soured somewhat on the company’s then-management.”
He delayed selling in 2014, as the company’s problems multiplied. “The company’s market share fell, its margins contracted and accounting problems surfaced,” Buffett said. “In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.”
By the time he sold, Buffett realized a total after-tax loss on the investment of $444 million. Though shares of the company soared 27.2% year to date, they still closed at $8.38 per ADR Tuesday, less than half of Buffett’s original price.
Because Buffett began selling after he lost faith in Tesco’s management, he likely would have make the same decision whether Tesco’s sales continue to improve or not. He also never gave his opinion on the new management Tesco hired around the time he exited, saying only, “We wish them well.”
Go to Warren Buffett's portfolio. Not a Premium Member of GuruFocus? Try it free for 7 days.
