Tesco PLC: Patience Is A Virtue

There hasn’t been much in the way of news from Tesco (LSE: TSCO) since the company issued its trading statement for the 13 weeks ended 30 May 2015, at the end of June. 

And after a flurry of news releases at the end of last year, some investors could be concerned about the lack of correspondence between the management team of the UK’s largest retailer, and the group’s shareholders.

Still, no news is good news, and there seems to be plenty going on behind the scenes at Tesco.

Long-term play

Tesco’s turnaround was always going to take time but the retailer’s management has all the tools at its disposal to instigate a recovery. Indeed, Tesco’s troubles are similar to those faced by larger peer Carrefour several years ago. 

Carrefour, the world’s second largest retailer in terms of sales, was hit hard by the European debt crisis. Sales collapsed across Europe and during 2011, the company’s share price was cut in half. Drastic action followed. 

Out went Carrefour’s old management team and new managers embarked on a ‘ruthless’ cost-cutting programme. Carrefour’s dividend payout was scrapped and the group began exciting markets around the world.

It took nearly two years for Carrefour’s recovery to gain traction and the company is only just starting grow again. 

Only just started

Compared to Carrefour’s turnaround, Tesco’s restructuring has only just started. The company kicked off its reorganisation during January, announcing a raft of cost-cutting measures, the benefits of which should begin to show through within the company’s next few trading statements. However, the bulk of the cost savings will take several quarters to filter through as Tesco merges its offices and exits costly contracts. 

What’s more, it is taking time to process and discuss the sale of Tesco’s international businesses. Tesco is trying to reduce its £22bn debt pile by selling off lucrative assets like its Dunnhumby data management business for £2bn and the group’s Korea business, which has a £4bn price tag. Management is trying to avoid a fire-sale by taking time to get the best price possible for these businesses.

But overall, things are changing at Tesco and it’s clear that shoppers are slowing their exodus from Tesco’s stores. During the first quarter of 2014, Tesco’s UK sales fell by 4%, which marked a low point in the company’s performance. By the fourth quarter of 2014 declines had slowed to 1.7% and during the first quarter of 2015, Tesco’s like-for-like sales fell by 1.3%. Like-for-like volumes rose 1.4% during the 13 weeks ended 30 May 2015. 

Also, Tesco’s European sales are starting to show signs of life. Total European sales for the 13 weeks ended 30 May, Tesco’s central Europe sales volumes rose 2.2% on a like-for-like basis and this trend should continue as the European economic recovery gains traction. 

The bottom line

All in all, Tesco’s recovery is starting to take shape. However, just like Carrefour’s recovery, Tesco’s turnaround will take time. 

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Rupert Hargreaves owns shares of Tesco. 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.