Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Dave Lewis is having a spring clean.

At the back of the kitchen cupboard the chief executive of Tesco has found some forgotten assets, well past their sell-by date.

Tesco said last week that it was closing its Nutricentre health retailing business. Lewis is also preparing to sell Giraffe, the family-friendly dining chain, Sky News reported. Private equity executives expect its Dobbies Garden Centres to also be put on the block; this may be part of a broader clear-out this year.

Giraffe, the Harris + Hoole coffee chain and Euphorium bakery were added by former chief executive Philip Clarke in an effort to breathe fresh life into Tesco's big stores.

The much-maligned Clarke, who was ousted in mid-2014, wasn't too far off the money. Tesco had too much space that it needed to fill -- this is part of the reason rival Sainsbury is buying Home Retail Group for 1.4 billion pounds ($2 billion).

Lewis Premium
Tesco's valuation has pulled ahead of rivals on hopes CEO Dave Lewis's strategy is paying off
Source: Bloomberg

But Tesco stores weren't firing on all cylinders. They were too expensive compared with the German no-frills supermarkets, Aldi and Lidl. Meanwhile, the drive to meet City profit expectations by cutting costs translated into dirty shops with inadequate staff. So no matter how many chichi food outlets Clarke added, that didn't stem the tide of sliding sales.

There have been some encouraging signs recently that his efforts are paying off, with sales beginning to stabilize. Tesco's sales fell by 0.8 per cent in the 12 weeks to March 1, half the rate of decline in the 12 weeks to the beginning of February, according to Kantar Worldpanel, the consumer research group.

Right Direction
Tesco's sales growth is improving although it remains stubbornly negative
Source: Bloomberg

But Tesco is by no means out of the woods. Its efforts to take on Aldi and Lidl with a new value range of food products were ridiculed after the brands were named after fictitious farms.

Selling off the non-core businesses is a needed step, and shows that Lewis is focusing on turning around Tesco's core U.K. grocery business, which still accounts for two-thirds of sales. But it isn't going to move the dial in financial terms. Clarke paid 50 million pounds for Giraffe in 2013. Bankers reckon Dobbies could be worth 180 million to 200 million pounds.

That pales in comparison to Tesco's total borrowings of 17.7 billion pounds as of October, and its 4.2 billion-pound pension deficit. And those figures offer some stark context for forecasts of earnings before interest and tax of 937 million pounds in the year to the end of February 2016.

While earnings before interest and tax are forecast to improve by 2017 to 1.24 billion pounds, that is still just a third of Tesco's 4 billion-pound peak in the year to February 2012. Lewis has warned that any extra profit will be used to invest in cutting prices, which is also needed -- like all U.K. grocers, Tesco will have to continuing growth of discounters Aldi and Lidl, which are opening new stores apace.

Tesco shares have rallied 27 percent since the start of the year, on hopes that it has turned the corner. They trade on 21.6 times the next 12 months earnings, an almost 30 percent premium to the sector.

Hope Factor
Shares in Tesco have surged since the start of the year on expectations of a sales recovery
Source: Bloomberg

That looks to be a triumph of hope over reality. Lewis's kitchen-cupboard clear out is commendable, but annual results next week will need to show that Britain's biggest retailer is making more fundamental progress on all key fronts: sales, debt and profit. 

Lewis's spring clean is really just a light dusting. The harder work remains to be done. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net