tesco hq

Clive Black, analyst at Shore Capital: ’Tesco’s recovery has been slow but steady’

Tesco boss Dave Lewis today reported on a ninth consecutive quarter of growth for the supermarket giant.

With UK like-for-like sales up 2.2% - but fresh food sales up 3.3% year on year - Lewis said it was outperforming the market for volume growth three years into its recovery, in what is the last set of standalone results before it expands into a new wholesale empire on the back of the Booker merger.

Here is how analysts and other experts reacted to the results.

Bruno Monteyne, senior analyst at Bernstein:
“On track to deliver 3.5%-4.0% operating margins… this could be one year early. Group operating margin in H2 was 3.0% with 42bps H2 improvement in the UK and the rate of improvement accelerating. A similar step up in the UK next year could see Tesco already within the 3.5%-4.0% guidance next year. Management increasingly talking about a focus on cash generation and ‘sustainable returns to shareholders’.”

Clive Black, analyst at Shore Capital:
“A stronger ship sailing into calmer waters in the UK & Ireland. Tesco’s recovery has been slow but steady. Such progress should help the aspiration to gain an investment grade rating from the somewhat rearview-looking credit rating agencies (horse bolted, door closed comes to mind). In the core UK market, LFL sales (ex-VAT, ex-fuel) grew by 2.3% (Q3 FY2018; 2.3%), which we deem to be a credible performance representing the ninth period of positive LFL growth. Tesco’s UK market share in groceries is now seemingly stable, albeit sustaining ongoing same-store progress will be set against tougher multi-year comparatives.”

Daniel Ekstein, food retail analyst, UBS:
“Tesco has printed strong FY17/18 numbers. This is tangible progress towards the 3.5-4.0% mid-term EBIT margin target. It’s pleasing to see the strong momentum with which Booker joins the group - LFLs rose to 9.9% in 4Q17/18 and EBIT was £5m ahead of our starting point.”

Richard Lim, chief executive, Retail Economics:
“A laser-like focus on the core UK food business continues to deliver impressive gains. Deeper price investment, a more focused range and further asset disposals have slowed the loss of market share and boosted further improvements in profitability. With household budgets under pressure, the supermarket appears to have benefited from shoppers trading down to own-brand labels, which deliver more sustained profitability. Meanwhile, online growth continued to outstrip all other formats as both coverage, the speed of delivery and average basket values improved. With the Booker tie-up now complete, the grocer is well-placed to deliver cost-saving synergies with the newly formed business and take the discounters head-on.”

Danielle Pinnington, managing director at Shoppercentric:
“The change in approach from Tesco seems to be paying off. A strong Christmas showed how far things had turned around, and the more confident approach to advertising and communication continues to demonstrate a return to what they are best at. That said, they’ve had a couple of recent slips that have kept social media busy: the proposed changes to Clubcard were not well received by loyal shoppers, nor was the meal deal shrinkflation which hit stores in this last week. So they need to be mindful that shoppers have so many easily accessible alternatives to Tesco. The business needs to cast a shopper perspective over all their plans, to make sure they don’t lose touch and alienate the very people making such a difference to their bottom line.”

Alastair Lockhart, insight director at shopper and retail marketing agency Savvy:
“In large part Tesco’s results today are a continuation of the retailer’s recent progress. Sales are growing, profitability is improving and crucially Tesco has its confidence back and is behaving like a market leader. From the shoppers’ perspective stores are looking better, innovative products are hitting the shelves and the retailer’s price position is sharper. What we’re looking for now is further clarity on Tesco’s plans for Booker, as this is set to form the foundation for Tesco’s development over the next few years. It will be interesting to see how Tesco’s technology and processes can benefit Booker customers and symbol operators. And, perhaps more importantly, the merger gives Tesco access to the foodservice market, and therefore a new platform for growth.”