Today, Tesco reported a 3.3% increase in sales for the first half of the year, with profit expectations for the year on track. This is how the analysts reacted.
Bruno Monteyne at Bernstein said: “This is a fantastic set of results for Tesco, delivering on all aspects of the UK recovery and providing solid future margin guidance. Management have guided to £1.5bn of cost savings over the next three years and capex to support this programme of £1.4bn. If the market gets comfortable with this guidance we would expect it to support a fundamental rerating of the stock.”
Clive Black, analyst at Shore Capital, took a slightly more cautious view: “Tesco’s results are largely, if not totally, devoid of major organisational re-engineering, unlike the prior couple of editions, further reflecting the progress made by Dave Lewis and his team in stabilising and recovering this once great organisation. The results themselves represent demonstrable operational improvement from the business with cash sales and not just volumes now positive in the UK in particular, alongside much needed margin accretion. We welcome this progress. However, the operations in isolation do not characterise the Tesco investment thesis. The burden of broad level indebtedness and the corresponding high solvency ratios continue to prevent us from taking a more positive view on the group’s shares.”
Phil Dorrell, partner at Retail Remedy, praised the strategic direction: “It’s good to see that the important business of selling grocery is firmly in focus at Tesco HQ and the accounting sideshow has not distracted Dave Lewis from doing an excellent job. Tesco’s offer has not significantly changed, it has just evolved. Range rationalisation and flow of goods on the shop floor are simple changes, well executed.
“Price perception has been helped significantly with the Tesco Farms brands. Media mutterings aside, the customer isn’t feeling misled, they are feeling well provided for with a product that meets price and quality needs.
“The sideshow of the accounting fraud is just that, a sideshow. Our advice? Concentrate on the growth of the business and delivering value to the shareholders. The skeleton will soon be buried.
“We are entering the golden quarter for grocery and Tesco will be up against a resurgent Morrisons, a wounded but not down Asda and a Sainsbury’s armed with Argos. Tesco will have room to push further on price if they need to and a rash of offers lined up ready to deploy. Dave Lewis projects confidence, and confident he should be.”
Independent analyst Nick Bubb also gave a positive mention to the Farms brands: “Helped by the success of the Farms brands, UK sales were up by 0.9% LFL in Q2 and things are going so swimmingly that the jump in the group pension deficit to £5.9bn is hardly mentioned. But the key part of the statement is that Tesco have been emboldened to share their ambition to deliver 3.5%-4.0% group operating margin by 2019/20.”
Steve Dresser, director at Grocery Insight, suggested Tesco should broaden its horizons: “At the high level results are good. Growth everywhere. However, they need to look beyond food and be better at non-food perhaps?
“From where the business was headed (a large iceberg), Dave Lewis has done an admirable job in turning the tanker towards steadier waters. The mere fact we are sat, an hour or so ahead of the half year, talking about profitability and not how negative the like for like will be is testament to the work done by all within the business. With the margin investment, it stands to reason that Tesco will look internally at their operation and cut costs where they can. The recent news of night shifts disappearing in a number of stores pre Christmas is notable. Once again, a reminder of how retail turns the full circle.”
John Ibbotson of Retail Vision added to the praise for Dave Lewis’ leadership: “There’s still a long way to go but Tesco, make no mistake, has started to hit its stride. Its competitors will have cast a nervous eye over these latest results.
“The slickest thing about Dave Lewis’ approach has been its simplicity: reducing prices to regain competitiveness in the core UK business, rebuilding all-important customer trust and strengthening the balance sheet by selling off non-core operations and stores. To top it all off, Lewis has turned the Tesco tanker around against a backdrop of ruthless competition and broader food price deflation. Yes the turnaround has been slower than some would have liked, but let’s not forget that Tesco’s fall from grace was extreme.
“One fly in the ointment is the looming £5bn pension deficit, while the litigation surrounding the 2014 accounting scandal also won’t go away.”
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