Tesco’s has warned on profits and new chief executive Dave Lewis has been parachuted in a month early. Here’s what City analysts are saying.

Mike Dennis, Cantor Fitzgerald

“We still believe the new CEO and FD need to find £500m+ of annual cost savings and take a £150m provision to reduce UK staff numbers by 10% or 20k FTEs [full-time equivalents] and refocus the business formats on driving cash profit growth.

“A £800m reduction in total dividend and £500m cost base reduction would give Tesco £1.3bn of extra cash to either invest in price and put its main competitors in considerable margin pain or build a new trading strategy around different formats.

“The read across is that Tesco’s investment in margin and recovery plan could easily wipe out the majority of its main competitors’ trading margins, forcing them to reduce their dividends and capex and also forcing the discounters back to a loss making position, as they were in 2009.”

 

Clive Black, Shore Capital

“It is very disappointing to see this update, which fundamentally raises questions in our minds about the capability of the management under Mr Clarke at this once great company.

“We expect, as part of a range of measures, there to be considerable senior management change under Mr Lewis in time, as Tesco needs a world class top team to take it forward.

The operational challenges and pressures for Mr Lewis are clearly considerable, though some of the financial pressures will be eased by a 75% cut to the interim (and we expect full-year dividend) to 1.16p which will take the yield down to 1.6% but save the group c£900m per annum, which in addition to a £400m cut to capex spend (in IT and store refits) provides £1.3bn of annual cash resource for the new team.

“We can speculate but not predict Mr Lewis’ priorities. As such, we should also respect the fact that he needs time to assess matters and manage the business.

“Hence, whilst this update is unhelpful, it does not adjust our view that Tesco UK needs fundamentally better management and that this is a group where the pint can still be more than half full. ‎

“In time Mr. Lewis may also have views on the make-up of Tesco but stemming the tide of decline in the core has to be the priority.”

 

Bruno Monteyne, Bernstein

“Can we now call the bottom financially?

“We would say no; we had previously forecast profitability in the UK to drop to 2.8% in 2015/16 caused by three factors: kitchen sinking, investment in new strategy and continued poor trading performance leading to negative operational gearing.

“The first of these may have been brought forward, but without knowledge of the new strategy we cannot conclude how much it investment it will take and we cannot expect any sudden reversal in trading fortunes to stem the negative operational gearing.

“Additionally, even though the new CEO is starting sooner, the new CFO does not start until 1 December and he may have further cleaning up of the accounts to do. The good news is that we may have that new strategy sooner than expect

“Tesco would not have cut its dividend without the new CEO’s sign off, so this is evidence that he has been working behind the scenes even before his new start date.

“We therefore may hear more about the new strategy at the interim results on 1 October, whereas previously that was meant to be Dave Lewis’s first day on the job.

“By doing this  work now, it creates a sense of urgency internally and externally. He is admitting there are big problems and big problems need big solutions. This creates credibility with investors that he will do the right stuff.”

 

James Anstead, Barclays

“Although one can derive some positive aspects from this statement – most notably the earlier arrival of the new CEO and at least some clarity on near-term numbers – we think the market will be negatively surprised at the extent of the cut in the interim dividend, even if it does not necessarily imply a similar full-year  cut.

“The market may sympathize with the board’s desire to give the new CEO maximum flexibility, but the extent to which Tesco has done this (via dividends and capex) will highlight the difficult situation in which the company finds itself. We would expect Tesco’s shares to be hit materially on the back of this news.

“Although the news in today’s statement does not directly impact on its listed peers Sainsbury and Morrison, the market will likely interpret the news as negative for peers in that Tesco’s new CEO will be in place earlier and will have greater freedom of action than was previously expected.

“We would therefore expect the shares of Tesco’s peers to also be hit materially – perhaps Sainsbury more than Morrison given it is usually seen as the most likely victim of increased competition in the UK market.”

 

Phil Dorrell, Retail Remedy

“What’s certain is that we won’t be seeing a rapid turnaround. Tesco is an oil tanker and any material change of direction will not happen quickly.

“In the weeks and months ahead, Dave Lewis and his team will need to rethink the entire Tesco model.”