This Makes Me More Bullish On Tesco PLC

The profit warning issued by Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) in early 2012 hit the company hard. Shares fell by around 20% and the tenure of new CEO, Philip Clarke, looked set to be a lot shorter than that of his predecessor, Terry Leahy.

However, the warning seems to have acted as a wake-up call for Mr Clarke to run the business as he sees fit and to not merely seek to be Terry Leahy mark II.

So, I was pleased to read recently that Tesco is continuing to make the business more efficient and is seeking to further reduce costs. Indeed, this seems to be the obvious strategy while top-line growth is incredibly difficult to come by.

However, that’s not to say that such improvements to the business are always going to be welcomed by the media or, as was recently the case, by politicians.

Indeed, the shadow immigration minister criticised Tesco’s use of non-UK workers in a speech recently. The main thrust of his argument was that, with so many UK nationals out of work (especially among the younger generation), why are companies such as Tesco hiring so many non-UK workers.

Of course, Tesco needs to balance cost reductions, productivity improvements and other efficiencies with negative news flow. Such criticism, although it proved fairly ineffective in this instance, has the potential to damage sentiment among consumers who are already far more savvy about supermarkets than they were prior to the credit crunch.

However, the news is yet another example — along with the decision to sell Fresh & Easy, become part of a Chinese joint-venture and reduce the pipeline of new stores — of Philip Clarke getting a grip on the company and running it how he sees fit.

He has already improved the fortunes of the UK operations, whose like-for-like sales figures are more respectable than they were a year or two ago. Decisions to utilise non-UK labour (which may lead to a lower cost base) may be unpopular among certain commentators but show that he is trying to act in the best interests of the people that matter: investors in the company.

Furthermore, with shares trading on a price-to-earnings (P/E) ratio of 10.3, they compare very favourably to the wider food and drug retailer sector on 11 and to the FTSE 100 on 15.2. In addition shares currently yield an impressive 4%, which is a major plus for income-seeking investors like me.

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> Both Peter and The Motley Fool own shares in Tesco.