Comment: Tesco should be relieved but there are still more vices than virtues

Tesco is approaching the anniversary of a dark day in its history when it announced a major underperformance of its home market leading to a material acceleration in the group’s change strategy.

That change involved a material rebasing of its domestic trading margin, a new management team and the group’s chief executive, Philip Clarke, taking full control of the UK operations.

What a difference a year makes. About one-third of the way into a three year plan of improvement and Tesco UK has, against favourable comparatives and with said margin in tow, emerged as one of the Christmas winners in the UK supermarket scene, delivering like-for-like (LFL) sales a little ahead of Sainsbury’s and materially above struggling Morrisons. More to the point a sign of the progress made is reflected in Mr. Clarke being able to relinquish day-to-day control of the UK to new managing director, Chris Bush.

We sense that Tesco is relieved, pleased but not displaying triumphalism with its improved momentum. And for good reason too. The UK consumer remains in a distinctly sluggish spot and Tesco has much more to do to be more competitive, especially in non-food. Of course, Tesco is not just a UK operator, being the third largest retailer in the world and today’s trading statement also reveals more vices than virtues for the group outside of these shores.

Most specifically management is particularly cautious on unemployment burdened Central Europe where sales actually fell over Christmas, it is trying to cope with prohibitive shopping hour restrictions on large stores in its second most important market, South Korea, whilst working away on the most effective exit possible from the US.

Tesco’s expanded Executive Committee management has much to focus upon from a wide range of perspectives. However, a more substantial strategic change may be evolving whereby the business responds, reacts and emerges to markets by becoming much more cash generative through a focus on sweating its 120m sq ft retail base, opening fewer and smaller stores whilst harnessing the opportunity of multichannel in a more focused organisation. That investment thesis promises a prodigiously free cash generative Tesco; until now largely a contradiction in terms. Such an evolution will take time but it could be very rewarding for its shareholders.

Clive Black, analyst, Shore Capital Stockbrokers