Analyst views on Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) improved through the second half of 2014. I say improved, but ‘became less negative’ would be more accurate. There was no increase in the number of analysts rating Tesco a buy, but several ‘sellers’ moved to a neutral position.
So, what did the City experts make of yesterday’s trading update?
Performance
Tesco reported sales numbers ahead of consensus forecasts for the 19 weeks to 3 January. The closely watched like-for-like number for the UK business came in at -2.9% (compared with -5.4% in Q2). Furthermore, there was an improving trend through the period, with -0.3% posted during the six Christmas weeks.
Unsurprisingly, the figures were applauded, both by bull analysts (“real progress” — Bernstein) and bears (“clearly encouraging” — Cazenove).
Turnaround plans
Tesco’s new chief executive Dave Lewis announced a raft of measures to regain competitiveness in the tough UK market, including lowering the price of hundreds of the nation’s favourite brands, closing 43 unprofitable stores (and the company’s Cheshunt HQ), as well as a range of operating efficiencies.
Tesco’s weakening balance sheet has been a major concern for the City, and the company also announced its “first steps” to strengthen its capital position. These included abandoning 49 big store building plans, selling Tesco Broadband and Blinkbox to TalkTalk, slashing capital expenditure and cutting this year’s final dividend. The company is also looking to close its defined benefit pension scheme and at options for extracting value from its dunnhumby business, which runs Clubcard.
Some analysts reckon the better-than-expected trading performance has allowed Tesco to hold off on more extensive asset sales and/or, in the words of Cazenove, “to postpone a decision on a rights issue”. Veteran retail analyst Nick Bubb was perhaps the most pessimistic in saying “Tesco has announced a raft of crowd-pleasing measures but they may be too little to late, given the scale of the structural problems in the business”.
Overall, though, Tesco’s turnaround plans were broadly welcomed by analysts. Societe Generale captured the general City take: “Tesco has started to move in the right direction but it needs to do more on all fronts in our view” … which is pretty much what the company itself is saying.
Conference call
My impression from the Q&A with analysts at the conference call was that the City is prepared to cut Lewis some slack. Certaintly, Lewis and finance director Alan Stewart weren’t given a hard time when declining to give concrete numbers and timescales in their answers to some of the most burning questions on analysts’ lips.
When does Tesco expect like-for-like sales to turn positive? — Lewis said he doesn’t have “a crystal ball”; it depends on so many variables.
What is a sustainable long-term margin for Tesco? — Lewis said: “I’m not going to give you a number for margins”, adding only that he believes if they invest in the right way there is a position for Tesco to be “above, slightly above industry margins”.
How are property impairments looking? — Stewart said they’re in the middle of a comprehensive review of the methodology, so he couldn’t yet say, beyond “I think there will be some impairment which comes through”.
When will Tesco restart dividend payments? — Stewart said “I’m not going to give a time on it … We need to get the leverage in the business to a state that’s not going up, that it’s actually coming down … When that comes? We’ll see”.
What is the right level for Tesco’s leverage, vis-a-vis the company’s investment grade credit rating? — Stewart: “I really don’t know”.
It will take time for investors to get answers to all these important questions — weeks in some cases; months or years in others — but the improvement in analyst sentiment towards Tesco seen in the second half of 2014 looks set to continue.
