Iceland - if our local Tesco is any guidance..

All,

Surely we have all heard of empty supermarket shelves, but I personally do not do the shopping. So the below video and photo of our local Tesco store are a strong reminder of how little supermarkets are set to suffer compared to other businesses. It certainly does not look like Tesco have had turnover problems recently. 

Iceland are not endowed with particularly strong liquidity after spending hundreds of millions of CapEx on store expansion and a new distribution centre - and on filling that with inventory, particularly when anticipating the impending maturity of the remaining £45m 2020 SSNs in July. However, that still leaves the company with a £70m buffer and people will still need to eat. The scarcity on the shelves suggests that prices are under no particular pressure (few promotional prices in the video), as would usually be the case in a downturn. At least not yet for the supply that has already been ordered. 

If, as management commented on the last call, Iceland’s clients are not in a position to panic-buy vast quantities upfront, they will likely continue to buy as they go along. With fewer sandwiches on the go and more people staying at home, demand for supermarket food should rise. Moreover, supermarkets in most countries are remaining open even as the rest of the country has to lock down and at this time of the year Iceland is not about to lose particular party-related revenue as it would have over Christmas. 

The biggest threat could come from suppliers unable to deliver. But food production is still ongoing, even in countries like France, which is otherwise under lock-down (supermarkets are open too).

So we think £70m of liquidity should be enough to cushion any drop in demand and provide for the operation of the stores. Bonds are yielding over 15% for interest cover of 1.5-2x normalised.

We like it.

The frozen and chilled sections - traditionally Iceland’s strong segments.

Wolfgang