Analysis: five things we learned from Tesco's first-half results

Here are five key things revealed in the supermarket giant’s latest financial update.

The portfolio review of larger non-core businesses is complete

Tesco says its portfolio review has been concluded following the £4.2bn sale of its South Korean Homeplus business and the failed disposal of data arm Dunnhumby, which is now to be retained.

At pains to point out that no more major assets will be sold off, chief executive Dave Lewis asserted on numerous occasions that Tesco is “done” with disposing of international businesses in a bid to quell speculation surrounding its central European, Thai and Malaysian operations.

Tesco says it will now focus on “generating cash from retained assets”, and signs of improvement have been seen in its international businesses.

The grocer reports a 1% increase in international like-for-like sales. Both its European and Asian operations were in positive territory during the second quarter.

…but smaller non-grocery businesses could still be sold

In the same breath as confirming that Tesco European and Asian operations are to be retained, Lewis refuses to rule out the offloading of smaller, non-grocery businesses in the group including garden centre chain Dobbies, the Harris + Hoole coffee shops and Giraffe restaurants.

“When we talked about a business review and portfolio reshaping that was against a requirement to de-lever the balance sheet,” he says. “With all due respect to those businesses, the reason for us to be in or not to be in any of those won’t be linked to the balance sheet, it will be more about a strategic decision.

“Any conversation about other things in the group will be about strategically do we want to be in that category, yes or no? That’s not portfolio reshaping in any material sense.

“We will churn the estate in terms of our asset base but that’s business as usual.”

However, Lewis maintains that those non-core businesses are “not a distraction”, but part of Tesco’s unique offering.

Tesco’s larger stores are not unprofitable

“It’s simply not the case,” says Lewis, hitting back at suggestions that Tesco’s big shops are unprofitable - although he refuses to reveal just how much profit they do make.

In the UK, like-for-like sales in Tesco’s largest Extra stores fell 1.1% in the second quarter, following a 2.4% decline in the first quarter and a 6.3% slump in the third quarter of 2014/15.

Its superstore estate experienced a similar drop off in sales of 6.1% in the third quarterlast year, but the investments signed off by Lewis in price, service and availability stemmed the decline to 3.4% in the first quarter of this year and 2.3% in the second.  

Lewis says he is “reasonably happy” with the performance of the larger stores, which are “responding to the treatment we are giving them”.

However, he and finance boss Alan Stewart refuse to rule out further store closures, particularly as leases reach expiry, but they do say shutting stores is not on their agenda at present. Tesco has closed 53 stores in the UK under the stewardship of Lewis.

No rights issue on the cards

Analysts have long speculated that Tesco could search for a cash injection from shareholders to help shore up its battered balance sheet - which still shows a £17.65bn black hole even after the sale of the Homeplus business.

Lewis insists that a rights issue is not on Tesco’s agenda while admitting he never rules anything out.

“There is no stress in our business, there is no pressure, there is no need,” he says. “We want to improve the business ourselves. We think that people who have invested in this business already, quite rightly, should ask us to do as much self-improvement as we possibly can before we would consider going there.

“We’ve demonstrated through the sale of Homeplus and the other things that we’ve done, that we can significantly improve the balance sheet in a manageable, good business way.”

The board excludes itself from buying shares

Lewis has faced criticism from some quarters for not purchasing shares in Tesco, particularly following Morrisons boss David Potts’ decision to acquire a stake in the grocer after he took the helm in March.

But Lewis reveals that he and fellow board members have agreed to ban themselves from trading in Tesco shares.

“We are in possession of quite considerable inside information about what may or may not happen in the Tesco group,” Lewis explains. “Add to that the regulatory review, which we have to deal with confidentially, and we as a board took a decision that while those things were ongoing, we would exclude ourselves from being able to trade Tesco shares.

“We operate under that restriction to this day because we think that is the right corporate governance to have when you are going through this sort of turnaround and have these sorts of issues.

“A lot of people want to buy shares in Tesco, they are just not allowed to.”

He says that he would definitely buy shares in the supermarket if he could.