Tesco has revealed the first quarterly rise in sales in three years, while full-year operating profits returned back to the black to reach £1.05bn, up from a property-driven loss of £5.75bn last year. Here’s how the City reacted.
Phil Dorrell, partner at Retail Remedy, said CEO Dave Lewis had made “great strides” in focusing Tesco on being a good retailer again. “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.”
But he also warned: “The elephant in the room is surplus space. Tesco have the biggest space challenge of all the grocers and have 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. 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.”
John Ibbotson of Retail Vision hailed the results as an “extraordinary feat – turning around an oil tanker in a very tight spot”. He added: “Yes, the turnaround is painfully slow, but for the Tesco behemoth to have begun its pivot without hitting the rocks is a huge achievement. For a brand that last year posted the largest ever loss on the UK high street, the return to sales growth for the first time in more than three years feels like a transformation.
“Dave Lewis has made some tough decisions, stopped the rot and halved the decline in Tesco’s market share. Its rate of growth is still paltry compared to that of Sainsbury’s and the discounters, and the future promises low profits and slow sales growth. But given the huge challenges Tesco faces, this performance looks little short of visionary.”
Shore Capital’s Clive Black said: ”Compared to its near all-time record asset impaired losses of 2015, Tesco’s 2016 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. Dave Lewis, the group’s likeable CEO, deserves considerable credit for steering this near retail shipwreck to calmer waters, where the group’s ‘engineers’, can and are now making progress.”
Arnauld Joly at Société Généralé said Tesco showed “encouraging progress”, though higher-than-expected net debt of £5.1bn against consensus expectation of £4.8bn was a “disappointment”.
Bernstein’s Bruno Monteyne commented: ”This is a great update from Tesco looking backwards: solid sales and volume growth, and marginally beating consensus.”
However, he called Tesco’s profit guidance for next year “disappointing”. “Tesco is not really guiding for profit improvements but for profit stagnation despite the tail winds from buying back leases,” he said.
Ray Gaul, vice president of research and analytics at Kantar Retail said the annual results are ”designed to heat up investor sentiment”. He said: ”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 reduced indebtedness by a whopping £6.2bn .
“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.”
Catherine Shuttleworth of shopper and retail marketing agency Savvy forsees success if Tesco ”can bring back the human and cheeky side of its brand, which defined it through its rise to dominance in the 90s, we believe it can regain the trust and respect of shoppers. The next 6 months will be key in proving the recovery can keep building momentum. It if does, that will put the likes of Asda and Morrisons under more pressure still.”