Grocery giant Tesco's (TSCO) turnaround drive under CEO Dave Lewis is beginning to take effect, with investors bidding up the shares on a first quarter sales 'beat'. However, sales remain on the slide at Britain's biggest retailer and there remains much work to do to turn this corporate supertanker round.

Tesco shares are in demand this morning, up 3.35% to 225.05p on a better-than-feared 1.3% decline in UK like-for-like sales (excluding VAT and fuel) over the 13 weeks to end-May. Delivered despite industry price deflation, this is ahead of the 2-to-2.5% decline anticipated by broker Shore Capital.

Web chart - TSCO - June 2015

Furthermore, the performance represents an improvement on the 1.7% decline witnessed in the fourth quarter of the previous financial year as well as on the 4% decline in Q1 like-for-likes seen last year. The figures confirm Tesco, in the recovery ward after posting a string of profit warnings and announcing (22 Apr) a record £6.4 billion annual statutory pre-tax loss, is making progress.

Shoppers are evidently responding to Tesco's investment in service and price cutting, as well as Lewis' efforts to simplify the product range. UK like-for-like volumes are up 1.4%, transactions 1.3% higher and there's healthy growth in customer numbers to report. Lewis says 'these first quarter results represent another step in the right direction', also highlighting same-store sales growth in Central Europe and Turkey, as well as improvements in hard-pressed Thailand and Korea. Conspicuous by its absence is any commentary on asset sales; Tesco is in the process of selling Dunnhumby, the data analysis unit behind its Clubcard loyalty scheme and its Korean Homeplus business is also under the hammer.

Despite these positive quarterly steps, Tesco has work to do to combat market share erosion at the hands of German discounters Aldi and Lidl, while 'Big Four' rivals are slashing prices too. Amid deflationary pressures in the structurally-challenged food retail sector, Lewis admits 'the market is still challenging and volatility is likely to remain a feature of short-term performance'. For an in-depth look at the turnaround strategy being pursued under 'Drastic' Dave Lewis, check out our recent cover story focused on recovery stocks.

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Issue Date: 26 Jun 2015