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The Tesco PLC Revival Was Fun: Now The Hard Work Starts

I hope you enjoyed the recent revival in the fortunes of supermarket giant Tesco (LSE: TSCO), which has seen the stock rebound 40% in the last six months.

It was fun while it lasted, but now the party is over. The stunning £6.4bn pre-tax loss announced this week, the largest ever by a UK retailer, brought it to a dismal end.

And rightly so, because the Tesco revival had run its course, being primarily a reaction to the earlier sell-off, which was also somewhat overdone.

It was also the market’s way of applauding new boss Dave Lewis, in part because he wasn’t Philip Clarke, but also for the unsentimental way he set about shaking up the business.

Shutting stores, closing the HQ, junking private jets, culling 10,000 jobs, terminating the final salary pension scheme, offloading BlinkBox and partly reversing the dash for convenience stores demonstrated that Lewis understood the scale of the challenge ahead of him.

You Shop, Shares Drop

Lewis has got his strategy right in a different way. He needs to buy time to turn Tesco round in the teeth of notoriously short-term market sentiment. He certainly wants longer than markets gave Clarke.

And he is doing that by scraping together all the bad news  he can find and getting it out there while he can still blame it on his predecessor.

It is an ancient strategy (Henry VIII’s first act was to execute his father’s hated tax collectors) but he has set about it with gusto, exposing the accounting scandal and now these apparently desperate results.

In fact, they relate mostly to asset write-downs rather than a sudden slump in trading, which has actually been picking up lately. Not so desperate, then.

UK like-for-like sales actually rose for the first time in more than four years, while customer transactions reversed recent falls to rise 1.5% in the fourth quarter.

Tesco To Go

Lewis now has a string of easy wins under his belt, and he deserves applause for his early success.

He has cannily lowered investor expectations into the bargain, so even tiny forward movements will be cheered to the rafters.

Markets reacted to the loss of relative calm. They still believe in Lewis. Difficult times lie ahead, however, because he has to show progress in the one thing that really matters, persuading shoppers to return to Tesco.

That won’t be easy, now that it isn’t just socially acceptable to admit shopping at Aldi and Lidl, but positively virtuous.

Markets have faith in Lewis, and right now, so do I.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK 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.