Tesco Turnaround Gains Pace as Lewis Calms Grocer’s Doubters

  • Sales increase marks another step in CEO’s turnaround efforts
  • Harris & Hoole coffee-shop chain to be bought by Caffe Nero

Tesco Plc reported a second straight quarter of U.K. sales growth, the first time it’s done so in five years, and raised the possibility of resuming dividends as new ranges of cheaper fresh foods proved a hit with customers.

U.K. same-store sales rose 0.3 percent in the 13 weeks to May 28, Britain’s biggest grocer said Thursday, slightly ahead of analysts’ estimates for a 0.2 percent increase. Tesco shares rose 1.7 percent to 169.30 pence at 1:30 p.m., a balm to investors gathering for the company’s annual meeting in London.

The sales growth marks another step for Chief Executive Officer Dave Lewis’s effort to win back disaffected shoppers by giving them lower prices and better service. Challenges still remain, such as the company’s 15.5 billion-pound ($23 billion) debt pile, its junk credit rating and encroachment from new competitors such as online giant Amazon.com Inc.

“Tesco will be encouraged by delivering two consecutive quarters of like-for-like sales growth but the numbers are marginal, reflecting how difficult the competitive trading environment is for mainstream retailers,” Jon Copestake, an analyst at the Economist Intelligence Unit, said by e-mail.

The share gain helps trim a decline of almost a third since the start of April amid concerns that the price cuts it’s made to improve sales will dent profitability. The grocer has overhauled categories like produce and meat, labeling containers of strawberries and packs of chicken breasts under the banner of fictitious farm names such as Rosedene and Willow.

The fresh-food revamp has worked “almost exactly as Dave Lewis said it would,” said Charles Allen, an analyst at Bloomberg Intelligence. “It shows the retailers understand customers better than the chattering classes.”

The seven new fresh food brands introduced in March meant customers were able to save about 17 percent on the price of 10 of the most popular meat, fruit and vegetable lines, Tesco said. Demand for fresh produce was 5 percent ahead of the U.K. grocery market, though the lower prices reduced same-store sales growth by 0.7 percentage points.

Overall, the cost of a weekly shop at Tesco has declined by 6 percent since September 2014 as it seeks to fight back against the expansion of discounters Aldi and Lidl.

Tesco is determined to reintroduce dividends, though can’t put a date on it, Chairman John Allan told the annual meeting. The grocer last made a shareholder payment in 2014.

To help sharpen management’s focus, Lewis this month jettisoned its Turkish grocery business as well as its U.K. garden-center and restaurant chains. That process continued Thursday with the sale of the unprofitable Harris & Hoole coffee-shop chain.

’Big Endorsement’

“This sharpening of focus can only lead to better retail stores,” said Phil Dorrell, an analyst at consultant Retail Remedy. “Staying in positive territory is a big endorsement of the turnaround strategy.”

Harris & Hoole’s 42 outlets, 31 of which are located inside Tesco stores, are being acquired by rival Caffe Nero for a price that Chief Financial Officer Alan Stewart described as immaterial. The coffee chain made a pretax loss of 25.6 million pounds in the 53 weeks ended March 1, 2015, official documents show. Tesco bought out its partner in the venture in February.

The grocer has no plans for any further asset sales at the moment, Lewis said on a conference call with reporters.

Tesco is comfortable with analysts’ estimates for full-year operating profit of 1.18 billion pounds, Stewart said.

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