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

Dave Lewis is gradually ticking the items off of his shopping list.

Tesco's first U.K. same-store sales growth for three years is pretty handy as is a reduction in total borrowings to 15.5 billion pounds ($22 billion) from 17.7 billion pounds in the middle of last year. That includes a reduction in the pension deficit to 2.6 billion pounds from 3.9 billion pounds at February 2015.

Positive Ground
Tesco has announced the first increase in U.K. same store sales growth for three years
Source: Bloomberg Intelligence

Clearly Tesco has stabilized compared with a year ago, when it was still reeling from the worst crisis in its almost 100-year history after the previous management overstated profits.

Where Lewis is making less progress is translating that sales recovery into higher profits.

True, Tesco bounced back into the black at a pre-tax level, after taking into account exceptional items. That's mainly because of stonking 6.7 billion pounds of write-downs and charges last time -- arguably a kitchen sinking that rebased profit to Lewis's benefit.

It also met forecasts of operating profit before exceptional items, delivering the promised 944 million pounds in the year to February. But Lewis won't be drawn on how far and fast profits will grow from here.

He needs to keep cutting prices to maintain the sales momentum, and that's expensive. While the "aspiration" is to improve profitability, he acknowledges this won’t happen in a smooth line. He reckons that to meet the 1.25 billion pound consensus for the year to February 2017, and continue to invest, would be a pretty big ask.

The shares fell as much as 5 percent on the cautious guidance. Still, they are up about 25 percent since the start of the year. They trade on a forward ratio of price to earnings of 21 times, against 17 times for the European sector.

Equity investors clearly believe the Tesco juggernaut is finally turning. Bond investors less so.

As the chart below shows, the spread to government bonds has widened over the past month, underperforming the broader European high yield index.

Wrong Direction
Tesco bond spreads widened in the past month, while the broader market gained ground
Source: Bloomberg
Normalized spread performance

Bondholders may have already figured out that sales growth wasn't going to feed into profits anytime soon, and will want more evidence that the reduction in debt will continue. Clearly the company's cash cushion has improved: it generated 1.3 billion pounds of free cashflow in the year to February, compared with a 1.34 billion pound outflow a year earlier.

But the credit ratings are languishing below investment grade. They were pushed down to junk levels at the start of last year, and it's a fair question to ask whether the company's focused on quickly exiting that status. Tesco has more than 1 billion pounds of bonds coming due in each of 2016 and 2017, and a few more hefty maturities in the years after that. 

Refinancing Needed
Tesco may be wise to use cash coming in to pay off debt coming due
Source: Bloomberg

The shares are now approaching the point where a multi-billion pound rights issue would be possible. Lewis seems to have chosen instead to trade through the debt pile.

He's still got a few big items to drop in his shopping cart. There's a lot of room in there for a clear demonstration that his recovery is more than just a pickup in sales.

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

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Andrea Felsted in London at

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Jennifer Ryan at