The market was expecting a half-year report from Tesco (LSE: TSCO) today. What it wasn’t expecting was an announcement alongside it that chief executive Dave Lewis has resigned and will leave the business next year.
Here, I’ll give my view on the FTSE 100 supermarket group’s results and the shock news of the boss’s departure, and tell you whether I’d buy, sell, or hold the stock today.
Lewis started as chief executive in 2014 when the company was in turmoil, with profits falling and dodgy accounting exposed. Today, he said: “Our turnaround is complete, we have delivered all the metrics we set for ourselves.” Explaining his departure, he told us: “My decision to step down as Group CEO is a personal one. I believe that the tenure of the CEO should be a finite one and that now is the right time to pass the baton.”
Chairman John Allan commented: “Dave has done an outstanding job in rebuilding Tesco since 2014.” He said he accepted his resignation “with regret.” He also expressed his appreciation that Lewis had indicated his intention to step down “some time ago,” allowing the chairman time to implement an orderly succession. And on this front, the company announced Lewis will be succeeded next summer by Ken Murphy, chief commercial officer of multinational retail giant Walgreens Boots Alliance.
Murphy looks a good fit to me. He has strong experience and skills across both retail and wholesale, and Tesco tells us he also has “values which align with our own.” Nevertheless, I think Lewis, who I’ve always been hugely impressed by, will be a hard act to follow. The good news for Murphy is that he inherits a business in infinitely better shape than the one Lewis took on back in 2014.
Performance and prospects
Group sales in the 26 weeks to 24 August increased 0.1%, but were 0.4% lower at constant exchange rates. Sales at reported and constant rates actually increased across all regions with the exception of Central Europe — declined 7% (reported) and 6.3% (constant) — where management is repositioning the business for profitable growth.
Sales growth of 0.2% in the UK and Republic of Ireland bodes well for the future, given it was achieved under challenging external conditions, against a tough comparative from last year’s exceptionally warm weather, World Cup and Royal Wedding, and a 0.4% negative impact from the closure of UK online general merchandise business Tesco Direct in July 2018.
Moving down the income statement, the performance becomes stronger still, with underlying group operating profit increasing 25% (at a very healthy 4.4% margin), underlying earnings per share soaring 49%, and the board hiking the interim dividend by 59%.
Lewis said that with the turnaround complete, Tesco can now implement “the next steps of our sustainable growth strategy” from a position of strength. He outlined plans including a step-up in the store opening programme, an increase in online capacity, and the acquisition of Best Food Logistics as a further engine for its expanding wholesale business.
At the checkout
While the FTSE 100 is slumping today, Tesco’s share price is up 0.6% at 241p, as I’m writing. It’s trading at 13.8 times forecast 12-month earnings with a prospective dividend yield of 3.5%.
I think the company has a sound strategy for sustainable growth, and that the valuation is attractive. I reckon the fundamentals trump CEO succession risk, so I rate the stock a ‘buy’.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.