Tesco has issued a set of preliminary results that underscore its recovery and set the expectation for brighter times ahead.
We have applauded Dave Lewis, the group’s chief executive, for the way that he effectively saved Tesco from driving at pace over a corporate cliff edge.
However, in the intervening period since the remedial action days, he has assembled a highly competent team that has diligently and effectively focused upon an improved shopping trip and structural simplification, so leading to cost reduction, cash generation and broad-based earnings progress.
As such, Dave Lewis is engineering balanced growth from Tesco and as a measure of progress it was noteworthy to hear him state that all of the group’s business units, including Poland, were profitable in the second half of its financial year.
Tesco cannot be considered a particularly exciting shopkeeper at this time.
The UK business in particular has invested considerably in price on lines that matter, most prominently through Farm Brands and more recently Exclusively at Tesco
Its recovery has been centred upon a detailed attention to shop-keeping basics – clean stores, uncluttered aisles, full shelves and speedy check-out services – all of which is underpinned by an enormous programme of work that has embraced the whole organisation and all of those with which it is engaged, most notably its staff and suppliers.
Additionally, the UK business in particular has invested considerably in price on lines that matter, most prominently through Farm Brands and more recently Exclusively at Tesco.
That price investment and functional effectiveness has removed many reasons for its shoppers to try something different. More to the point, as the business becomes more profitable, it is our expectation the group is not going to forget the hard lessons of the last decade, and so we expect ongoing investment in the retail proposition, price and service.
Such smoke signals from management should weigh heavily upon Sainsbury’s in particular, where functional excellence is absolutely not the appropriate current descriptive term of this troubled business.
Tesco’s management team will no doubt be glad to see the back of its October 2016 financial targets – in which it set itself a group margin target of between 3.5% and 4% – and it has made it clear that investors should not expect any new financial ambitions to be so granularly set out in the future.
However, with the group in a more stable position, noting considerable progress in the problem areas of not just Poland but also general merchandise across the board and Thailand in particular too, then it is not unreasonable to expect ongoing financial progress from the business.
At a more human level, it was quite marvellous to hear Charles Wilson speaking with his usual aplomb at the Tesco analyst meeting
Following Morrisons’ lead, we note with interest that Tesco has set out a new capital allocation strategy that is grounded in an ongoing focus on the customer, cost and cash management, capital discipline and, in the absence of major M&A, the prospect of the distribution of surplus cash flow to its shareholders.
It is also most welcome to see the group’s aspiration for 2x dividend cover to be effectively brought forward a year. Such a point in the group’s dividend strategy would probably pave the way for distributions to reach investors sooner rather than later.
Finally, at a more human level, it was quite marvellous to hear Charles Wilson speaking with his usual aplomb at the Tesco analyst meeting on the considerable progress that Booker made over the year to February. A Tesco with the Great Wilson in good shape can only be all the stronger.
Dave Lewis and his team deserve a pat on the back for their achievements.