Retail analysts give their views on Tesco’s first-half figures and prospects

Tesco’s interim results have positively surprised us to the extent that its accounting issues have been fully quantified – even if a full explanation must wait. This news therefore eliminates the worst-case scenarios.

“While this resolution is welcome – and may provide relief – there is still very limited visibility on other issues. “We had not expected any wider strategic viewpoint and indeed that will have to wait, as will any more specific comments on potential divestments, although the company remains clear that ‘all opportunities’ are being reviewed.” James Anstead, Barclays

 

“Tesco’s share price has halved since last year’s interims when the shares were 359p, and so has the profitability. Management will need to focus on UK trading ahead of the important Christmas period to make sure availability and promotional offers are executed. The profit outlook now depends on what route Dave Lewis intends to take to rebuild sales and reconnect with its customer base and lapsed loyal shoppers.

“First, we believe, he needs to simplify the business via UK and international asset sales, then reconnect with suppliers by changing payment terms and lowering his cost of goods and then start on the long road to rebuilding the Tesco brand with shoppers. Tesco has the most developed multiformat strategy and is well placed in the convenience market so should benefit from this growth but will need, in our view, to redeploy space in hypermarkets to more productive use. All this could take several years but we see some easy wins on costs and cost of goods.” Mike Dennis, Cantor Fitzgerald

 

“The noises being made are the right ones. ‘Recover competitiveness’ (ie improve pricing), ‘building trust and transparency’ (note: not ‘recover’ but ‘build’) and value and balance sheet strength (which likely means asset disposals). Although we did not expect a full strategy presented, we do feel that they could have gone further: they do not describe what assets might be for sale and there is no clear assurances on the Christmas Period.They are ‘reviewing all opportunities that exist’ – pretty universal, but no specifics.” Bruno Monteyne, Bernstein

 

“Tesco remains a business in transition, it has been so for years now but the corporate physicians in recent times were applying inappropriate medicine to pre-existing conditions, weakening ‘the patient’ further still. Even in better hands it remains the fact that a business of this scale needs time to be positioned to compete to customer benefit on an ongoing basis. We highlight customer benefit because without their patronage shareholders will not ultimately see a reward from rising earnings and sustainable dividends; noting that the interim 2015 pay-out has been cut by 75%. Management is pointing to further headwinds and the need to prioritise the customer, leading us to retain our expectation of a c75% full year dividend cut too.” Clive Black, Shore Capital

 

The bad news doesn’t seem to have an end at present. The current decline comes as Tesco concludes an internal investigation into a £263m profit overstatement. Tesco’s like for like sales fall also comes as the firm sits bottom of a customer satisfaction survey, despite an £800m investment in better stores and services by Philip Clarke, Lewis’s successor. To top things off Lewis will have to face the future without the Chairman, Sir Richard Broadbent.

If there is a silver lining for Tesco it is that Lewis will no doubt now have carte blanche in engineering a turnaround. As an outsider he comes in unencumbered by the firms previous mindset and has a clean slate to work from.  It is also worth remembering that, despite everything, Tesco still managed to turn a quarterly profit and it remains the largest retailer in the UK as well as one of the four or five largest globally. There is a precedent here, with Georges Plassat at Carrefour delivering a quick turnaround by exiting a host of foreign markets to refocus on its domestic share. Rumours are already circulating of an Asia spin off for Tesco to release funds for UK investment.  Jon Copestake, retail analyst at The Economist Intelligence Unit.

 

“Sir Richard Broadbent’s decision to fall on his sword was, on balance, the right one. Unlike Dave Lewis, he has been there throughout. Tesco needs a clean break from this sorry saga and, through Sir Richard Broadbent’s departure, will have the best chance of achieving it. The presence of accountability will restore a degree of faith. The fact that Tesco has chosen not to provide full year profit guidance underlines the extent of its problems. For Tesco, it really is do-or-die time.” Phil Dorrell, Retail Remedy

 

“What was largely absent from today’s update is a sense of the strategy Dave Lewis will employ to enact changes at Tesco. “This is to be expected as today is about financial performance and not the time for unveiling grand plans. However, in our view it is necessary for Tesco to spell out, and enact, this strategy sooner rather than later. At present the perception is of a company drifting in a sea of various crises and it is important for someone to place a firm hand on the tiller and guide Tesco back to the calmer waters of growth.” Neil Saunders, Conlumino