Tesco’s Holiday ‘Rescue’ Just the Initial Step for CEO Lewis

Tesco Plc is “just at the beginning” of a long road to recovery, Dave Lewis said today, as he announced better-than-expected holiday sales and initiatives to restore the fortunes of the struggling British grocer.

The shares rose a record 15 percent after the chief executive officer said he would close unprofitable stores, slash capital spending and explore raising billions of pounds through a possible sale of the Dunnhumby data-analytics unit.

Yet for investors and analysts, the former Unilever executive still has a long way to go to show he can bring about a lasting improvement at the U.K.’s biggest supermarket company, whose shares fell 43 percent last year after a series of profit warnings and a 263 million pound ($397 million) profit over-statement that led to a fraud investigation.

“The better-than-expected Christmas selling season is the most welcome thing,” David Fergusson, chief investment officer of Singapore-based Woodside Holdings Investment Management Pte., a Tesco shareholder, said in a phone interview. “Frankly I’d have been almost suicidal if they were worse. But one swallow does not a summer make. Let’s hope they do it again.”

Tesco’s U.K. same-store sales -- a key barometer of a retailer’s health -- beat analyst estimates over the festive period, falling 0.5 percent excluding value-added tax and fuel compared with an anticipated decline of 3.5 percent. A gain in the amount of fresh food sold, the first such increase in five years, drove the beat and sent shares soaring.

Bar Raised

The holiday results are a solid first step for Lewis, who’s trying to revive Britain’s largest grocer amid encroachments from discount retailers Aldi and Lidl. Yet they also raise the bar for investors, who now expect to see positive same-store sales next quarter.

“It’s easy enough to get some top-line sales response if you throw enough money at the problem, but Tesco have yet to explain how they will make any money in the U.K.,” Nick Bubb, an independent retail analyst, said by e-mail.

Lewis went part of the way today to improving Tesco’s finances, by cutting next year’s capital spending to 1 billion pounds, half this year’s amount, and announcing the possible sale of Dunnhumby, an asset that may be worth as much as 2 billion pounds. He also promised to shut dozens of unprofitable stores and close the company’s Cheshunt, England, headquarters, which employs about 3,000 people.

Yet there are concerns about how much of this will need to be ploughed back into price-cutting, store improvements and staffing as Tesco battles competition from rival British supermarkets and German discounters Aldi and Lidl.

Lower Margins

“Cash conservation measures will keep the wolf from the door for now but margins will remain lower for longer and we remain cautious,” James Collins, an analyst at Oriel Securities, wrote in a note.

There was also an acknowledgment that Lewis had made a decent start, including the hire of the well-regarded Matt Davies, Halfords Group Plc’s CEO, as head of Tesco’s U.K. operations.

“This is a positive statement in many respects,” said David McCarthy, an analyst at HSBC. “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.”

Lewis made the produce aisle his battleground during the Christmas season. He lowered prices on bags of carrots, cauliflower, potatoes, parsnips, and brussels sprouts -- all staples of a typical British Christmas dinner -- to 49 pence ($0.74) a bag.

Christmas Rescued

“Tesco had a back-to basics Christmas -- it cut prices, giving shoppers what they want, and cut out complications,” said John Mercer, an analyst at researcher Mintel. Added Kantar Retail’s Bryan Roberts: “Christmas was genuinely rescued.”

In addition to lower prices, Lewis said shoppers had responded to improved service and better availiability of products at stores. Tesco had an additional 6,000 staff working in its stores over the Christmas period to greet shoppers and pack their bags, he said. About 93 percent of goods were available in stores, up from 88 percent.

Tesco wasn’t the only British retailer to benefit from a better-than-expected Christmas after cutting prices. J Sainsbury Plc said yesterday that it had a record week leading up to Christmas, processing more than 29.5 million transactions.

Even so, Sainsbury’s CEO Mike Coupe forecast no improvement in sales over the course of the year.

Lewis has dealt with difficulties before. During his 28 years at Dove soap maker Unilever, the former rugby player from Yorkshire, England battled Procter & Gamble Co. in South America and later steered the company’s Indonesian business through the Asian financial crisis of the late 1990s.

Now, analysts including Mercer say Lewis needs to build on the Christmas momentum and deliver positive U.K. same-store sales next quarter, which would be the first time since the fourth quarter of 2012. Lewis kept the price cuts coming today, reducing the cost of hundreds of branded products by 25 percent on average.

Yet with the supermarket price war likely to intensify, the U.K. environment is not going to get any easier in the coming year for Tesco. As Woodside’s Fergusson said: “They have a long way to go.”

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