Tesco boss faces chorus of scepticism on profit margins

Tesco investors are still waiting on Philip Clarke's promise to come good. Photograph: Joe Fox/Alamy

The Tesco fightback is now 22 months old, if one takes the starting date as the day in January 2012 that Philip Clarke, then the newish chief executive, delivered a thumping profit warning and confessed that the UK business had been "running hot for too long."

It was a polite way of saying that Sir Terry Leahy, his predecessor, had taken his eye off the ball as he pursued expensive foreign adventures, notably in the US and China. The remedy was to invest £1bn in the UK stores to generate "a step change" in performance.

Investors are still waiting. If the City analysts are right (which is the way to bet), next Wednesday's trading numbers will be horrible. Like-for-like sales in the UK could be down 1.5% in the latest quarter. It will be hard for Clarke to repeat his half-year boast that Tesco's UK performance has strengthened. The group is losing market share and Aldi, Lidl and Waitrose are the current winners.

But a longer-standing Clarke boast obsesses the City. He has claimed he can reinvigorate Tesco in the UK while maintaining profit margins at 5.2%. How? The supermarket game comes with high fixed costs, and traditional wisdom says a fall in same-store sales implies a greater fall in profits. How can Clarke hope to defy the maths and maintain margins?

Theories abound. Is Tesco actually taking chunks out of costs? Surely not, since Clarke has been adding staff, trying to shorten queues, and smartening stores. Is it squeezing suppliers? That's broker Cantor Fitzgerald's explanation. Or is it pushing up prices and hoping that higher-spending customers stay loyal if they are thrown enough coupons? Or is the official line – that the trick can be achieved by replacing sales of low-margin TVs with high-margin Finest food products – correct?

Whatever the truth, Clarke faces a chorus of scepticism that he can hold the line on profit margins. JP Morgan thinks weak trading will deliver only 5.1% this year, followed by 4.6% next, and offers a sharp diagnosis: "We believe that UK industry margins are too high relative to other European markets."

If Aldi and Lidl did not exist, argues JP Morgan, there wouldn't be a problem. But the continental invaders are now a force: "As the discounters keep re-engineering their product quality and price, we believe that the core own label of the big players is no longer competitive. We expect Asda to break ranks and force industry margins down."

If that's a plausible plotline, should Tesco abandon its 5.2% target and take the lead in cutting prices? The strategy could be pitched to investors as a necessary short-term measure to get more customers through the doors to experience the apparent wonders of the new Giraffe cafes, Harris + Hoole coffee shops and tidier aisles.

Clarke is probably not ready to alter course, since chief executives tend not to be panicked by a single weak quarter. But he is no longer a new boss and Tesco's overseas operations, where sales trends are even worse, provide no shelter. He's got a big call to make. Now that he has correctly diagnosed the error of Leahy's later years, it will not look clever if he tries to defend a target that is too hot to handle.

One of these days, this column will take a vow of silence on Royal Mail's underpriced privatisation. But not quite yet, because the research notes from the previously gagged analysts (those from banks working on the sale) point to a theme that was barely mentioned at the time of flotation and has been largely ignored during the business select committee's disappointing postmortem.

Those analysts, almost uniformly, think Royal Mail's dividends could become a thing of wonder. They may not put it like that, but look at Goldman Sachs' forecast for the dividend payout: £200m this year, which Royal Mail has already announced; then £282m; then £352m; then £414m in the 2016-17 financial year. That's a compound growth rate of 27.5% for three years. Very few FTSE 100 companies, as Royal Mail soon will be, can match those hopes.

Then consider how Goldman's analyst thinks the dividend can be cranked up so rapidly. He does not expect fancy balance-sheet games, like taking on a tower of debt. Instead, it's down to cash generation. Goldman thinks Royal Mail, with £723m of net debt at last count, can be transformed to a position of net cash of £207m in March 2017, even after paying those dividends.

Nothing is guaranteed, of course, and Royal Mail is a stock that comes with well-advertised risks. But, come on, at the float price of 330p, the starting dividend yield was 6%, which was attractive in itself. If there is also a sporting chance of the dividend doubling by 2017, the shares were chronically underpriced. Goldman's 50-page report sets a "12-month price target" for the shares of 610p.

The MPs, if they want to get to the bottom of the affair, should ask whether ministers really appreciated Royal Mail's dividend potential under its new, far more generous, regulatory regime. Were they blinded by an obsession with the risk of a strike?

For the record, here's Goldman's view of the effect on its forecasts of any strike: "Given the potential for variable and wage cost savings, a minor impact."

Was Royal Bank of Scotland merely incompetent in its lending to small businesses? Or has it also been tipping companies into insolvency and then buying their assets at knockdown prices?

The former allegation was the gist of Sir Andrew Large's verdict on RBS, as contained in a report commissioned by the bank itself. RBS did not have processes and systems to meet its own lending targets. It overcorrected for previous reckless lending.

This is serious stuff, undoubtedly, but should not be of direct interest to the Financial Conduct Authority, since commercial lending is not a regulated activity. The right response is the one RBS has taken: overhaul the machinery of lending.

But the second allegation is explosive. Lawrence Tomlinson, an adviser to the department for business, alleges that viable businesses have been deliberately wrecked to make a profit for RBS. That plainly requires a full investigation and the FCA was right to insist that it, and not RBS, appoint the investigator. And, if RBS is guilty of disgraceful and possibly fraudulent behaviour, the regulator should hit the bank with everything it's got.

Outsiders can only keep an open mind at this stage. But one can understand why RBS' board is mighty miffed, to put it mildly, not to have been given a chance to respond to Tomlinson before he published.

Investing is easy with hindsight, but here's a bet you might wish you had made on 1 January: put an equal sum into each of the 11 companies in the FTSE 350 index who had women chief executives.

Your portfolio would include two fallers: Imperial Tobacco (Alison Cooper), down 2%, and Anglo American (Cynthia Carroll, now departed), 28% lower. But they would more than outweighed by gainers like BTG (Louise Makin), up 67%, and easyJet (Carolyn McCall), 86% higher. Overall, the women-only portfolio would have returned 28%, which is rather better than 12% for FTSE 100 index, the 22% by the FTSE 250 and the 14% by the FTSE 350 itself.

Statistically meaningless? Absolutely. The performance period is too brief, performance versus rivals matters more, and 11 companies is too few. But the fact that there are only 11 is perhaps the real problem.

Female-led firms are on the up

Investing is easy with hindsight but here's a bet you might wish you had made on 1 January: put an equal sum into each of the 11 companies in the FTSE 350 index with female chief executives.

Your portfolio would include two fallers – Imperial Tobacco (Alison Cooper), down 2%, and Anglo American (Cynthia Carroll, now departed), 28% lower. But gainers would BTG (Louise Makin), up 67%, and easyJet (Carolyn McCall, above), up 86%. Overall, the women-only portfolio would have returned 28%, rather better than 12% for the FTSE 100 index, 22% by the FTSE Mid 250 and 14% by the FTSE 350 itself.

Statistically meaningless? Absolutely. The performance period is too brief; performance versus rivals matters more; and 11 companies is too few. But the fact that there are only 11 is perhaps the real problem.