Tesco PLC Should Learn From Carrefour SA’s Recovery

Tesco (LSE: TSCO) is the retailer everyone loves to hate. The company just can’t seem to find any friends. Indeed, despite the company’s size and multiple attempts to lure customers back into its stores, sales are still sliding and there is now talk of a dividend cut. 

However, long-term investors shouldn’t be worried as Tesco’s troubles are similar to those faced by larger peer Carrefour several years ago. Carrefour’s recovery, after only a year and a half, is starting to gain traction.  

European troubles Tesco

Carrefour, the world’s second largest retailer in terms of sales, ran into trouble back during the financial crisis and things steadily got worse. The European debt crisis sent the retailer over the edge and during 2011 the company’s share price was cut in half. Sales collapsed across Europe and the company was forced to take drastic action.

Just like Tesco, Carrefour’s first move was to give its CEO the boot. The new CEO found a company that had become complacent, over-complicated and disconnected from its customers and its roots — sound familiar?  

So, during 2012 the turnaround began. The new CEO immediately slashed the hefty marketing budget, and began exciting markets around the world. In addition, the dividend payout was scrapped and what has been described as a ‘ruthless’ cost-cutting programme began. 

Making progress

Now, halfway through its turnaround plan, Carrefour updated the market on its progress earlier this year. Thankfully, sales have begun to recover again and the company’s share price has nearly doubled from its 2012 low.

Carrefour’s turnaround shows what Tesco is capable of. Just like Carrefour, Tesco has overexpanded and an aggressive programme to cut costs, reduce waste and exit unprofitable markets will most likely turn the company’s fortunes around. 

Actually, it may be easier for Tesco to turn things. Carrefour’s key markets are within the Eurozone, where competition is aggressive and the economic situation is yet to improve. 

Unfortunately, Carrefour’s dividend cut does imply that Tesco is likely to cut its payout in the near future. Still, at present levels Tesco supports a dividend yield of 6%. Even if the payout was slashed by 50%, the company would still support a yield of 3% only slightly below the FTSE 100 average dividend yield of 3.4%. 

Turnaround will take time

It has taken Carrefour a year-and-a-half to start seeing results from its turnaround plan. With this in mind, as Tesco’s is yet to launch an aggressive turnaround plan, investors may have to wait several years to see results.

For long-term investors, two years of waiting is a small price to pay. What’s more, two years of lacklustre share price performance gives investors to reinvest their dividends at an attractive price, which should turbo-charge returns when Tesco springs back into life.

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Rupert Hargreaves owns shares of Tesco. The Motley Fool owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.