Tesco revealed this morning it has bounced back into the black in its full year. Here’s the City’s reaction.
“Compared to its near all-time record asset impaired losses of FY2015, Tesco’s FY2016 preliminary results are positively boring. The key word here though is ‘positively’, as one year on from a day of reckoning, Tesco has reported material steps forward on a road to recovery and, hopefully, a better place for its long-only investors. We believe that Dave Lewis, the group’s likeable chief executive, deserves considerable credit for steering this near retail shipwreck to calmer waters, where the group’s ‘engineers’, can and are now making progress.
“The simplification process is root and branch, embodying a lot of hard, diligent, sustained and somewhat below the radar work by management in our view, the last year including the still relatively recently appointed chief executive of the UK & Ireland, Matt Davies. Such behind the scenes activity with respect to the core market has already delivered a more resilient trading performance in the group’s critical core chain, but we expect to see more consumer facing output in FY2017 and beyond.
“We see Tesco shares as much more robust as an investment. There remains much more to do for this improving business to deliver the core chain trading margins, the reduction in operating leverage and so the scope to believe that earnings multiples can normalise and that dividend payments can recommence within a reasonable period of time.” Clive Black, Shore Capital
“This is a great update from Tesco looking backwards: solid sales and volume growth, and marginally beating consensus. However the guidance for profits next year is disappointing: Tesco is not really guiding for profit improvements but for profit stagnation despite the tail winds from buying back leases.
“One surprise is that Tesco is pointing to a 25% increase in Capex to £1.25bn (from £1bn this year). They are looking to refresh stores in the UK and accelerate growth in Thailand. This is a sign of confidence. Tesco is no longer just focussed on cash preservation but has the ability to go back on the offensive. Tesco still has low profitability so to be generating such high free cash flow at this stage of the recovery is excellent.” Bruno Monteyne, Bernstein
“Tesco chief executive Dave Lewis has announced preliminary annual results designed to heat up investor sentiment. Once under pressure on all fronts, Lewis and his team have given the company some breathing room, particularly on the balance sheet. The group has sold both profitable and unprofitable business units to refocus on the core UK grocery business and in 2015/2016 the company reduced indebtedness by a whopping £6.2bn.
”They have also generated cash – £2.2bn this year – and this will continue; only yesterday the group sold its stake in Lazada. As a result, and with investments in better pricing, a more attractive fresh produce and clothing offer, and improvements in staff motivation and service, Tesco is seeing footfall and shopper growth in all parts of the UK grocery business. Tesco’s shares were trading at multi-year lows ahead of Tesco’s last financial announcement but are now rising steadily as the news coming out of Tesco goes from good to better.
“However, the most important turnaround will be seen in Tesco’s large formats. Tesco Extra stores are now seeing positive footfall growth, which in turn is driving higher like-for-like sales. Tesco will continue to battle deflation and aggressive pricing strategies from its main competitors, including Aldi and Lidl, but is in a much better position to fight as it looks forward.” Ray Gaul, Kantar Retail
“Lewis has made great strides in getting Tesco closer to its roots, being a good retailer. Selling off peripheral businesses is absolutely needed in order to regain focus on the core Tesco supermarket business and return to growth. The elephant in the room is surplus space. Tesco has the biggest space challenge of all the grocers and has yet to identify anything convincing to fill it with.
“Investment in price and price perception still needs to be recovered. We are yet to see how Lewis intends to do this. Higher volumes would solve the problem but these are hard to come by in the current market. Some may criticise the pace of change at Tesco, but Lewis is now captain of a far steadier ship than the one he took on. Deep change was needed and that is what Lewis has delivered to date.
“A resurgent Morrisons, hungry discounters, a stronger Co-op and Sainsburys holding course, all come together to make a marketplace where complacency is very dangerous. Tesco won’t return to the profitability of a pre-Clarke era, but it can be a highly profitable business in the medium term.”
Phil Dorrell, Retail Remedy