Tesco, Britain's biggest retailer, has suffered a new blow after having its credit rating downgraded by Moody's to its second lowest investment grade level.
The troubled supermarket giant, which recently had its worst trading in decades, saw its credit rating slashed to Baa2 from Baa1.
The decision comes just weeks after fellow credit rating agency Standard & Poor changed its outlooked on Tesco to negative, but confirmed its BBB plus/A-2 rating.
Moody's explained that it took the decision because of Tesco's sliding profits and its "weak" sales results.
“We have downgraded Tesco’s rating owing to the increasingly difficult conditions in the UK retail grocery market, which contributed to a 6 per cent drop in the group’s 2013-14 trading profit and weak first quarter of fiscal 2014-15 sales results,” said Sven Reinke, senior analyst at Moody’s.
“We expect these conditions to continue affecting the company’s credit profile negatively over the next 12-18 months.”
Six Reasons Tesco's Dominance May Be Finished
Tesco can't shrug off its poor performance(01 of06)
Open Image ModalClarke blamed the dip in sales on cutting prices, moving away from vouchers and the disruption from refurbishing a large number of stores.However, Bernstein Research's Bruno Monteyne estimates that if you took out such costs, their like-for-like sales would still have dipped by 2%.
Tesco is trying too hard to appeal to everyone (02 of06)
Open Image ModalDiscount retailers like Asda specialise in offering good deals, while fancy supermarkets like Waitrose are without equal at providing luxury. So Tesco is trying to be a mix of everything, other customers are lured away by more specialised rivals.
Others are doing what Tesco is trying, but better(03 of06)
Open Image ModalTesco "has been increasing prices way too fast over the last few years to keep up earnings growth," Monteyne points out.As a result, compared to discount retailers like Asda, Tesco is at least 4% more expensive for shoppers.
1 million fewer customers are visiting a week(04 of06)
Open Image ModalThe proof that Tesco is having some issues comes in the footfall, as the chain seems to have lost more than 1 million customer visits a week, worth £25 million in sales.
Tesco has never done this badly (05 of06)
Open Image ModalClarke, who has worked for 40 years at Tesco, admitted: “I have never seen a quarter’s like-for-like sales like this before, that I can remember."Monteyne told Radio 5 Live the results were "the worst in their history."
Even Tesco's boss isn't confident (06 of06)
Open Image Modal“I see every day the improvements that are coming in the business, but I’m not making any promises about sales improving in the next few quarters," Clarke warned today. Meanwhile, other analysts like Julie Palmer at Begbies Traynor think Clarke "doesn't seem to have a clear turnaround strategy". He'll have to work hard to prove them wrong.
In response, Tesco said: “Moody’s announcement reflects the challenges for the sector as a whole, and the impact that they expect this is likely to have on our near term performance. However, they also acknowledge we have a plan to address structural challenges in the sector and we remain market leader both overall and in online and convenience which are critical to future growth.”
Former Tesco chief executive Sir Terry Leahy said he was "very disappointed" by the supermarket's trading performance.
The torrid trading has piled pressure on Tesco's current CEO Philip Clarke, who took over in March 2011, to improve the supermarket's ailing fortunes. However, he has dismissed any suggestion that he would have to resign and insisted that the supermarket's strategy is working.
Tesco revealed that its like-for-like sales had slid 3.7% over the last three months, just weeks after it posted falling profits for the second year in a row.