It’s time to consider buying Tesco plc again

Bilaal Mohamed discusses whether it’s time to look again at the UK’s largest retailer Tesco plc (LON:TSCO).

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Tesco (LSE: TSCO) has seen a truly spectacular fall from grace in recent years, with the retailer losing market share to no-frills rivals such as Aldi and Lidl, as well as facing stiffer competition from more traditional rivals such as Asda and Sainsbury’s. So why do I think it could be time to consider buying Tesco again?

Horror show

First of all, let’s not forget the scale of Tesco’s troubles. Shareholders have watched in horror as the UK’s largest retailer turned pre-tax profits of over £4bn in 2012 into a record breaking £6.4bn loss for fiscal 2015. As if that wasn’t dramatic enough, by 2016 underlying earnings had dwindled down from 40.31p per share to just 4.06p per share in just four years.

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Loyal shareholders who’ve kept the faith in the nation’s favourite grocer have seen the value of their holdings plummet from 388p per share just four years ago to today’s levels of around 174p. A 55% share price collapse for a previously unshakeable blue-chip retailer is dramatic indeed. Longer-term shareholders have suffered even worse, with the share price now 65% below the 492p peak achieved in 2007.

New vision

As you’d expect, Tesco hasn’t been taking this lying down. The man who came in to lead the firm, the group’s CEO Dave Lewis, has been hard at work trying to regain competitiveness in the supermarket’s core UK business, while protecting and strengthening its balance sheet and rebuilding trust and transparency with the customer. No sooner had he moved into his new job than changes were afoot.

In January 2015 he announced the closure of the group’s headquarters in Cheshunt, Hertfordshire with the loss of at least 2,000 jobs, as well plans to close 43 lossmaking stores, and the cancellation of 49 new large supermarket developments. The group’s new headquarters are in Welwyn Garden City, also in Hertfordshire.

On Wednesday, the group announced that it had struck a deal to offload its opticians business to Vision Express for an undisclosed sum. The supermarket chain has an optician service in 206 of its larger stores, which will continue to operate but as a concession under the management of Vision Express. The move comes after a number of other non-core businesses have been sold off by the CEO in order to concentrate on its core UK supermarket business.

Mega-merger

But it hasn’t all been sell, sell, sell. In January of this year Tesco announced that it had reached an agreement for a mega-merger with Booker Group (LSE: BOK) to create the UK’s largest food group. Perhaps understandably there are concerns over market dominance with Tesco and Booker being the UK’s largest food retailer and wholesaler, respectively.

Full-year results released earlier this month provided some evidence that Tesco may have turned a corner, with operating profits climbing 29.9% to £1.28bn, and like-for-like sales growth being achieved for the first time 2010. I think it could be time to reconsider Tesco. The recovery plan seems to be taking effect, and dividend payments are expected to start again in 2018. The shares are also trading on a much lower rating than in previous years, with the P/E ratio falling to 14 by 2018/19. The glory days may not exactly be back but Tesco is looking increasingly attractive.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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