Fresh perspectives but same challenges at Tesco, says Deutsche Bank

22nd Jul 2014 10:10

New board members at Tesco should give "fresh perspectives" for the supermarket group, but the business will continue to face the the same structural problems, according to Deutsche Bank.The bank maintained a 'buy' recommendation for the stock but slashed its target price from 342p to 313p after cutting its profit forecasts.Deutsche Bank said that incoming Chief Executive Officer Dave Lewis and newly-appointed Chief Financial Officer Alan Stewart should "hit the ground running given their experience". However, the bank said that it will take time for them to assess the business fully, draw up a plan and implement it."In the meantime trading is unlikely to improve enough to allay the combined pressures of channel shift and gross margin decline, even if Fuelsave and store refreshes start to contribute rather than drag. Hence our forecast downgrades, which assume the continuation of current weak trading."Deutsche Bank has lowered its earnings before interest and tax (EBIT) forecast for the year to February 2015 by 15%, assuming that the 5% decline in like-for-like sales implied by Kantar market share data for June continues over the next couple of quarters. It said it now stands at the low end of the consensus profit range, forecasting an 18% drop in EBIT this year.While the dividend estimate has been maintained, the bank noted "greater risk" to payouts."It's unrealistic to think that a new management team can quickly reverse UK trading momentum. We think the most likely outcome of a strategic review is acceleration of the current strategy, which would mean continued investment in the customer offer and store refurbs, both of which would continue to drag on shorter-term trading," Deutsche Bank said.The stock was down 3.4% at 278.84p by 09:32 on Tuesday, erasing all of the gains made Monday when Lewis' appointment was announced.BC