Tesco’s results represented another year of good, solid, sound, detailed progress by the business.
All credit, therefore, to Dave Lewis & Co for the delivery of a very credible and stable out-turn, one that if anything was remarkably ‘boring’ compared with the shambles, shenanigans and drama that he walked into in 2014.
Indeed, it is a little too easy at times to overlook the fact that the Tesco he took control of was in a perilous state and the achievements of the last three and a half years have been quite considerable.
“A results session that may be considered in a relative sense as a bit ‘boring’, if that is not being rude, is good for me”
So, a results session that may be considered in a relative sense as a bit ‘boring’, if that is not being rude, is good for me.
The highlights of last year from a trading perspective are the steady performance of Tesco UK, with consistent like-for-like sales growth through the year, a welcome and strong recovery in Ireland, and encouraging progress in the still-difficult Central European markets.
And, while taking tough decisions, favourable profit progress is coming through in Asia, with 6% trading margins.
Messrs Lewis and Davies, the latter whom we were sorry to see leave Tesco, have undertaken a lot of heavy lifting that is simplifying the business in all departments, including 5,000 fewer managers.
That work has structurally reduced costs, and with broad sales progress coming through is allowing margins to build – and it is important to note that margin gain is a result of improvements being made, rather than dictating what is done.
That margin progress in the year, 57 basis points of accretion, is important and perhaps the key output of the results because at 2.9% (3% in the second half), Tesco is well on the way to meeting its full-year 2020 target range, set out in October 2016, of between 3.5% and 4% (ex-Booker).
Back and front
From a shopper perspective much of that heavy lifting has been behind the scenes, but we sense that a pipeline of innovation is coming through that should make Tesco not just functionally more effective in-store but also a little more creative and interesting too for shoppers.
More mundane, perhaps, but critical to the health and sustenance of Tesco is the work on the balance sheet and the reduction of leverage.
Over the past three years total leverage has fallen by not far short of £10bn and there is more to come. With the Homeplus proceeds in tow from South Korea, net debt is well down, as is the pension deficit, while steady progress has been made to increase freehold participation, now sitting at 52%.
“The narrative of the Tesco story, from an investment perspective, has changed from one of recovery to progression”
And then we come onto ‘Chas’. The Booker ‘merger’ is now complete and Chas and Dave have been corporately wed for over five weeks. The chemistry looks good.
There is much to do and, frankly, Tesco is not helped by over-eager brokers expecting too much too soon, but there is clearly upside to come with Dave Lewis highlighting an aspiration of £2.5bn of incremental sales with £25m of revenue synergies having been guided to date.
We all know that Charles Wilson is a superb operator and, over time, additional benefits can reasonably be expected to emerge for the whole retail and wholesale side of Tesco in the UK and Ireland, auguring well for more good, balanced growth-on-growth.
The narrative of the Tesco story, from an investment perspective, has changed from one of recovery to progression.
The business is still some way from approaching peak profitability, but there is enough progress to date, fuel in the tank and talent to encourage me to expect a much brighter five years ahead than has been the case in the prior five.
Shareholders might like to replace the beer in the sideboard for something with a bit more fizz for future years.