Tesco facing 'challenges' as closures extend into Europe, says ShoreCap

14th Jan 2015 09:28

Shore Capital has warned about a "myriad of challenges" for supermarket group Tesco after it emerged that the company's store-pruning strategy has reached central Europe.After Tesco announced last week that it would be closing 43 stores in the UK, it has been reported that a further 13 outlets are set to shut down in Hungary and a couple more in the Czech Republic.Those closures in the Czech Republic, where the company operates from 86 hypermarkets and 124 smaller outlets, have now apparently raised the threat of industrial action with local unions looking to oppose the move."We will watch with interest to see how matters develop but clearly widespread action would not be helpful to Tesco's cause in this market," ShoreCap analysts Clive Black and Darren Shirley said.They said that with new chief executive Dave Lewis having plenty of "domestic distractions" to deal with - turning around the struggling core UK business - plans for Tesco's international operations are yet to be clearly articulated to investors.Black and Shirley believe that Tesco will most likely retain "the bulk" of its international operations, but said: "Questions perhaps persist most about Tesco's commitments to Turkey of all the markets in which the group operates, a market where disposal options have been explored under the prior regime, with the group now out of Japan and the USA and with new arrangements in place making for relatively capital light structures in China and India (we note that China Resources warned on profits in late 2014)."The analysts retained their 'hold' rating on the stock, saying that things have started to improve slightly after the "encourag[ing]" moves made by Lewis since he started in September.While the broker said that Tesco has "a lot more work to do" to prove it can grow earnings, the company's "greater stability is a key reason why we believe that the stock has stronger roots and greater downside protection now that at any stage over the last couple of years"."As such, Tesco's improved performance and better direction is a key reason why we see the UK food retailing sector now as 'neutral' rather than 'underweight' from a weighting perspective."However, it said that potential strike action in Central Europe serves as a reminder of the "myriad of challenges that can emerge for management".The stock was up 2.2% at 216.76p by 10:11.