What the analysts say: Tesco's turnaround plan bearing early fruit?
UK retailer Tesco booked better-than-expected UK sales over the key Christmas trading period as the group benefited from the various initiatives under its domestic turnaround plan. The group has invested in improving its customer proposition over the past nine months. UK shoppers have responded positively, driving like-for-like sales gains. However, the City reaction has been somewhat mixed, with some analysts highlighting last year's weak comparables while others have hailed Tesco's early gains.
"Today's statement follows a year of transformation... and is proof positive that Tesco is fighting to regain its previously unassailable position in the UK. Like for like sales in the UK have shown better than expected growth, whilst there was another strong contribution from both the online and food channels. Of course, the numbers are set against extremely weak comparatives and there remains much to be done. The company itself has sensibly played down its achievements in the period, preferring to highlight that the turnaround plan is still in its early stages and the reparation of the damage caused to its reputation is a long game." - Richard Hunter, Hargreaves Lansdown Stockbrokers
"Tesco's 2012/13 festive trading statement comes just two days before the anniversary of last year's momentous announcement to the market, when the business revealed very poor trading in its core marke and a rebasing of UK trading margins by c80 basis points in order to improve the competitiveness of the core chain; the performance of grocery in the core chain being the most important feature of the Tesco investment case. We believe that it should be reiterated that CEO, Philip Clarke's plan to re-energise Tesco UK is a three-year one, and so whilst much work has been undertaken and progress made (e.g. in-store service levels and fresh food ranging), evident in the recent UK performance, there remains a lot more to do particularly in mainstream own-label, non-food and store configurations. Indeed, Mr. Clarke spoke in the analysts' call about being only one-third of the way through the self-improvement programme." - Clive Black, Shore Capital
"A year on from an effective profit warning, Tesco has had an unspectacular Christmas in the UK given last year's very weak comparables and material margin investment. For the 6 weeks to 5 January 2012, Tesco reported total UK sales up 4.2% with LFL sales ex petrol and VAT up 1.8% compared to a consensus range of 0.5-1%. While on the face of it, this is a better number than consensus expectations and an improving trend on Q3, when UK LFL sales ex petrol and VAT (13 weeks to 24 Nov) were down 0.6%, it is a poor return when one takes into account that Tesco has invested 1% of its margin in FY13 to achieve this.... Tesco's shares have already responded to a better sales trend in the UK. However, it is early days in the implementation of management's six-part plan to Build a Better Tesco in the UK. There is still much to be done given general merchandise remains a drag and we believe there will be no visibility on whether UK profits have bottomed until the second half of 2013. With inflation coming back and too many of its international businesses also facing trading issues currently, we reiterate our Reduce recommendation as we believe there is a high risk that things will get worse before they get better." - Kate Calvert, Seymour Pierce Research
"Attention focused on UK LFL of 1.8% (consensus 1%), which is a good swing from 3Q's -0.6%, but is against easy comparisons. Sales are down on a 2-year view, with c10% volume declines. Tesco deserves credit for the improvement, but our industry concerns remain. The industry is going through a major transition, which is resulting in LFL volume declines and a fall in industry profits. As a well-known Tesco shareholder said "When bad markets and good management meet, it is bad markets that emerge with their reputations intact"....Tesco has made progress in the UK, but at a cost in extra staff and couponing. The UK industry remains in structural decline, in our view, and Tesco faces many other developing problems elsewhere. Our DCF-based target price values the shares at 295p and reflects our concerns on the UK and on International, which continues to be value destructive." - Dave McCarthy, Investec Securities
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