Tesco Drops After Morgan Stanley Downgrades Stock: London Mover

Tesco Plc (TSCO), the U.K.’s biggest supermarket company, fell in London trading after Morgan Stanley cast doubt on the retailer’s ability to revive earnings growth and cut its recommendation on the shares to “underweight.”

Tesco will struggle to improve profitability in its domestic market over the next three years because of investment that’s needed in areas such as staffing, private-label goods and store ambience, Morgan Stanley analysts led by Edouard Aubin wrote in a note released after markets closed yesterday.

The shares dropped as much as 1.1 percent, extending yesterday’s 2.6 percent decline. They were down 0.3 percent at 327.25 pence as of 8:43 a.m., the fourth-biggest drop in the U.K. benchmark FTSE 100 Index (UKX) and the fourth day of declines.

Having cut spending over the last five years to protect earnings, the retailer now requires a “reset” of its U.K. business, without which it will continue to lag behind competitors, the analyst wrote.

“Until it is prepared to take short-term pain for long- term gain, we think it will underperform,” Aubin wrote. “We believe a true reset is unlikely any time soon.”

Tesco, which is based in Cheshunt, England, introduced coupons and promotions on fuel and vowed to boost spending on customer service after saying in January that slowing sales growth at home would lead to “minimal” profit increases in the year through February 2013. Shoppers have decamped to both upscale chains such as Waitrose Ltd. and discounters including Iceland Foods Ltd. and Aldi. Bigger competitors Wal-Mart Stores Inc. (WMT)’s Asda and J Sainsbury have also gained market share.

Tesco has been downgraded at least 10 times since shares slumped 16 percent on Jan. 12. There are currently 12 “buy” recommendations, 18 “holds” and five “sells” for a consensus rating of 3.43 out of 5, the lowest since 2009.

To contact the reporter on this story: Paul Jarvis in London at pjarvis@bloomberg.net

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net

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