Half year results from supermarkets titan Tesco (TSCO) confirm progress with CEO Dave Lewis' turnaround plan two years in amid the most testing of grocery market conditions. Like-for-like sales in the UK rose 0.9% in the second quarter, at the top end of expectations and building on the first quarter's 0.3% improvement to give investors renewed confidence in the recovery story.
Click here to pick through interims from Britain's biggest retailer, which show Tesco beginning to hit its stride and spark an 8.3% (15.65p) share price surge to 204.35p. This is pleasing, since Shares flagged a buying opportunity at 164.45p in August on the grounds Lewis-led Tesco was leading the fightback against discounters Aldi and Lidl.
Today, the ex-Unilever (ULVR) man (pictured below) not only reports like-for-likes in the core UK business up 0.6%, but also a 2.6% improvement in international same-store sales, reflecting positive growth in Europe and Asia, and a 60.2% improvement in pre-exceptional operating profit to £596m.
'We have made further strong progress in the first half, with positive like-for-like sales growth across all parts of the Group as we re-invest in our customer offer whilst rebuilding profitability in a sustainable way,' says Lewis. 'The entire Tesco team is focused on serving shoppers a little better every day. We are more competitive across our offer. Prices are more than 6% lower than two years ago, availability and service have never been better and our range is more compelling. Our new fresh food brands are performing ahead of expectations, improving our value proposition and further removing reasons for customers to shop elsewhere.'
Investors are prepared to look past a 28.3% slump in statutory profit before tax to £71m, struck after exceptionals. Instead, they are clearly heartened by a seventh consecutive quarter of volume and transaction growth in the UK business as lower prices, simplified ranges and improved checkout waiting times combined to keep Tesco's tills ringing.
There's also a near-50% year-on-year net debt reduction to £4.4bn following further disposals (Kipa in Turkey, Giraffe, Dobbies Garden Centres, Harris + Hoole) in the half. And Lewis also shares his ambition to rebuild Tesco's battered operating margin to between 3.5% and 4% by the 2019/20 financial year, aided by some £1.5 billion of additional savings over the next three years.
John Ibbotson of retail consultant Retail Vision comments: 'There's still a long way to go but Tesco, make no mistake, has started to hit its stride. Its competitors will have cast a nervous eye over these latest results. The slickest thing about Dave Lewis’ approach has been its simplicity: reducing prices to regain competitiveness in the core UK business, rebuilding all-important customer trust and strengthening the balance sheet by selling off non-core operations and stores.'
Ibbotson continues: 'To top it all off, Lewis has turned the Tesco tanker around against a backdrop of ruthless competition and broader food price deflation. Yes the turnaround has been slower than some would have liked, but let’s not forget that Tesco’s fall from grace was extreme.'
Again, Tesco does not declare a dividend, though the major bear point in today's figures is the rising pension deficit, up from £2.6bn to £5.9bn due to lower bond yields since the Brexit vote and the Bank of England's cut in interest rates.
'For now the ballooning of the deficit is simply a problem on paper, but in March of next year Tesco undergoes its triennial pension valuation, at which point the deficit might start to harden into a cold hard cash call for the supermarket,' points out Laith Khalaf, Senior Analyst at Hargreaves Lansdown (HL.).