Company Notes—Tesco Plc. Update

I thought you might be interested in knowing what’s happening with the Tesco position in the portfolio and what the plan is going forward. I originally learned of the Tesco Company several years ago after Warren Buffett and several other outstanding investors began acquiring shares in the British retailer. Tesco had become one of the most successful retailers in the world, having risen to number two behind Walmart (even though most people in the U.S. have never heard of them) and commanding a 30% share of the United Kingdom grocery market. Thanks to such a formidable position, they then began an explosive growth strategy overseas. Unfortunately, retailing is a notoriously difficult business and not one that travels easily. Tesco’s focus on its overseas business began to take its toll at home—stores became stale, customers neglected and the competition moved in aggressively.

During this same time, the Great Recession also hit, consumer spending deteriorated, discount pricing intensified and the price of the stock declined significantly. A company as large as Tesco doesn’t usually underperform for long before its shareholders get restless and change becomes imminent. Tesco was no different—they announced a new CEO, began to sell unprofitable locations, reduced capital expenditures, lowered prices, started remodeling older stores and turned the focus back to the customer. Now it was time to join Buffett—we bought shares and waited patiently for the rebound—not! Today the stock price is 25% lower, sales continue to decline and the board just announced it’s replacing the current CEO with one chosen from outside the company (the first in Tesco’s nearly 100-year history).

So now what’s the plan? First—the new CEO is a very successful senior executive with the Unilever Co. and is intimately familiar with Tesco’s business. Unilever is a company we have owned in the past and one I continue to admire so I’m inclined to give him a chance. Second—if worse comes to worse, we will sell the shares for a loss and offset some realized gains from some of our more profitable investments. It is never good to have losses in the portfolio, but I try to buy only those businesses that have the financial and managerial strength to withstand down cycles and emerge stronger and more profitable than before. We will know soon enough if Tesco is one of those businesses.

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David Burgess