Was Tesco's Christmas better than feared?

We look at analysts’ reactions to Tesco’s Christmas trading update to see whether Dave Lewis’ new strategy has won over – or at least reassured – the City.

Christmas not as bad as feared?

Bruno Monteyne, Bernstein

Tesco had an excellent Christmas (-0.5% lfl), 4% ahead of Q3 and 3% ahead of consensus. Tesco’s Christmas like for likes ran way ahead of consensus, with like for likes of -0.5% (consensus of -3.5%).  This is the best like-for-like number Tesco has been able to report for over two years. Last year’s Christmas lfl was -2.4% but food inflation was 3.2% higher at that time. That makes the lfl volume improvement YoY 5.1% better. The improvement from Q3 to Christmas shows the real progress that has been made in terms of the UK offer and also, combined with Sainsbury’s and Waitrose’s results, points to a good Christmas overall for food retailers.

Darren Shirley, ShoreCap

Christmas trade materially improved and beat market expectations with UK lfl sales over the 26-week period down 0.3% (Shore Capital forecast -2.5%). Furthermore, there are some real highlights with over the festive trading period with grocery home shopping up 12.9%, general merchandise online +22.2% and clothing online +52.4%, fresh food volumes positive for the first time in five years and Express +4.9% and GM +4.8%.

Jon Copestake, Economist Intelligence Unit

Tesco’s like-for-like sales reflect continuing weakness and a cut-throat market. Despite the frenzied scenes on Black Friday and the optimism over sales of groceries and general merchandise, Christmas was still a period of like-for-like declines thanks to discounts, price cuts and much cannier consumer shopping. M&S have also reported a poor quarterly performance and CEO Marc Bolland may be grateful that Tesco has hogged the retail limelight today.

Shoring up the balance sheet: store and head office closures

Fiona Cincotta, finspreads.com

I sum this Tesco update as the end of gluttony. For far too long, Tesco has failed to adapt to the structural decline the sector now finds itself in. The moves announced today, which see’s 43 unprofitable stores close, 49 planned store developments cancelled and the sale of Tesco Broadband and Blinkbox to Talktalk, helps to remove the fat around Tesco’s agility and performance. Tesco’s CEO Dave Lewis is in streamline mode and this is going to sit very well with shareholders.

Jon Copestake, Economist Intelligence Unit

Ending the pension scheme, 43 store closures, cancellations of new openings and a pay freeze are all designed to deliver the price cuts that will no doubt be needed to meet the growing challenge from discounters without completely compromising profitability.

Darren Shirley, ShoreCap

There is much to do on formats and store configurations, where down-sizing and re-engineering is expected to become more important. In this respect cash conservation means that capital expenditure is cut and we sense the majority of shareholders will welcome this development.

David Mccarthy, HSBC

This is a positive statement in many respects. It shows sales momentum is turning, that Dave Lewis will make bold decisions on all areas of the business, that the balance sheet is being strengthened, that management has been strengthened and that there are no sacred cows with the closure of the Cheshunt Head Office. It is hard to imagine much better news today. It is true the final dividend is being cut but that will help cash flow and balance sheet.

Bruno Monteyne, Bernstein

Closing the 43 unprofitable stores makes sense, as there is no point retaining cash draining assets, especially as Tesco likely has a nearby store to pick up at least some of the sales. These are 43 stores across all store formats (about half Express), and roughly 2% of UK space (0.5 to 1 million sq ft). This is in line with our view that the excess space problem in the UK won’t be solved by large scale store closures.

More asset sell-offs still to come

David Gray, Planet Retail

If Tesco is to rebuild its battered balance sheet without embarking on major asset sales, it will need to realise plans to cut costs. Even so, the tempting riches of the company’s property portfolio may prove too much to resist. Tesco may yet indulge in a measured number of sale and leasebacks. After all, the disposal of peripheral businesses, like the Dobbies garden centres and Tesco Homeplus non-food superstores - as has been mooted - may not raise sufficient funds to shore up the balance sheet.

Darren Shirley, ShoreCap

We also understand the decision to consider selling Dunnhumby, which could make a reasonable dent into Tesco’s net debt (Shore Capital estimates a value of £778m in our SOTP analysis), so potentially avoiding the need for a rights issue. The anticipated sale of Blinkbox to Talk Talk is small beer in this respect albeit the removal of mushrooming trading losses is welcome. We also welcome a cut in capital expenditure to c£1bn for FY2016 at least, through a cut in the store building programme.

Bruno Monteyne, Bernstein

Tesco has, as expected, begun to sell off some of its non-core assets, with Blinkbox and Tesco Broadband sold to TalkTalk.  Blinkbox was loss making, so this will improve profitability.  Dunnhumby is likely the next to be sold, with “the appointment of advisors to explore strategic options”. They state these are “first steps”, with further initiatives to maximise shareholder value to come. Speaking to the company this morning, it is clear that they know this is not the end of the disposal program, The Bank and Asian Assets likely next in the firing line.

Is Halfords CEO the right man to turnaround the UK business?

Matthew McEachran, N+1 Singer

At the moment Tesco appears to be adopting a strategy that is very heavily lead toward price. At the end of the day price is very important for supermarkets, but ultimately service, range and availability also counts.

Discounters don’t have to worry about customer service as much as the traditional superstores, but Tesco is not aiming to be a discounter so therefore part of the problem isn’t just about price and that is actually why Matt Davies is an interesting fit. He has a very good track record when it comes to formulating a plan which drives not just price.

All the other key aspects of retailing beyond price like stock availability, service, store environment etc had fallen behind. Matt has gone in and executed a plan which is addressing those things very clearly. If you buy into that – him having success on that front – then all those skills would lend themselves very well to dealing with the aspects beyond price and the significant problems at Tesco.

He is also very personable as well; he is very good with people. I get the impression with Tesco that with its huge number of problems he will need to get the team behind him.

Kate Calvert, Investec

Matt Davies will remain at Halfords until the end of May and then take up the challenging UK & ROI CEO role at Tesco. While the allure of Tesco is understandable, this is disappointing news for Halfords given that Matt is regarded as the architect of Halfords’ turnaround.

Bryan Roberts, Kantar Retail

Matt Davies is a left-field but excellent choice as new CEO of the UK.

Darren Shirley, ShoreCap

Davies’ appointment is important to our minds as it represents another external candidate taking up a key role at Tesco. By filling the UK role quickly, Lewis ‎will have more time to undertake important group work on the balance sheet, international operations and the remaining services such as the Bank. We will watch with interest to see how the management team and strategy further evolves at Tesco.

Nick Bubb, The Daily Retailer

The shares have jumped first thing, with Tesco playing down rights issue fears and announcing the eye-catching recruitment of Halfords CEO Matt Davies as Tesco UK boss.

Has Dave Lewis got his hands around the main issues?

John Ibbotson, Retail Vision

Dave Lewis has grasped the nettle and done what needs to be done. Finally, we are witnessing the beginning of the Tesco fightback. Tesco needed a completely new direction to thrive in the brave new world of retail and hang onto its market share. It now has one. Previous management lacked the bottle to do what needed to be done. Lewis, it would seem, has bottle aplenty. He has taken some tough decisions.

David Mccarthy, HSBC

Today’s statement shows CEO Dave Lewis’s intent. He invested in staff and quality over Christmas to drive sales, whilst working on strategy and the balance sheet. The focus will continue to be on the consumer and today we have seen the first step in a price repositioning, with Tesco cutting the price of several hundred branded products by c25%. Big decisions are being taken and many important strategic initiatives have been launched.

Jon Copestake, Economist Intelligence Unit

While shareholders may be happy about the announcement (despite receiving no final dividend) employees will not be. Tesco and Sainsbury’s have highlighted what a challenging market the UK will be in 2015. The cost cutting and price slashing approach from both signals more of the same for the year ahead.