Is Tesco finally back on its feet?

The supermarket reinstates its dividend as Dave Lewis's turnaround gathers pace.

by Adam Gale
Last Updated: 08 Nov 2017

A few ago, MT asked what was next for Tesco, the ‘toxic grocer’. It may sound extreme now, but it was a dark time for Britain’s biggest supermarket. Its finances and its reputation were in shreds, following revelations of a £250m accounting scandal in late 2014 and a record £6.4bn loss the following spring.

Chief executive Dave Lewis entered the breach at a critical time. The ex-Unilever man’s strategy was straightforward: fix the finances first, then fix the brand. Now that the firm has announced the return of its dividend for the first time in years (at a modest 1p), is it time to don a bomber jacket and call mission accomplished?

Let’s take a look at the basics.

Sales

Tesco’s first half revenues rose 3.7% to £28.3bn. That looks like solid growth, but it should be taken with a pinch of own-brand salt. Most of it is a result of inflation, with a little help from fuel sales. If you look at retail sales at constant exchange rates,  growth was a far more modest 0.7%, with volumes up 0.3%. But at least it’s not going down...

Market share

The fact that Tesco’s sales are not declining is an achievement in itself. The established supermarkets have been suffering for years as Aldi and Lidl have poached customers. Tesco suffered the most between between 2013 and 2015, but for the last two years it’s actually maintained its 28% market share. Sainsbury’s, Morrisons and Asda, meanwhile, ceded 2.4% of the entire groceries market to Aldi and Lidl in that time.

Profits

The headlines look great: Tesco’s pre-tax profits for the 26 weeks to August 26 2017 rose to £562m from £71m the year before. But again, let’s not get carried away. Operating profits before exceptional items were up a less eye-popping 27.3% to £759m, the difference in large part explained by last year's finance costs from the sale of Tesco’s Korean business, plus a cool £124m profit this year from selling its stake in south-east Asian ecommerce firm Lazada.

Margins

Tesco’s profit increase comes from better margins. The group operating margin rose to 2.7% from 2.2%; Lewis wants it to reach 3.5-4% by 2019-20. In a hyper-competitive market, where Tesco has raised prices an average 1% less than its rivals, this is no easy task. But a combination of cost-cutting (so far, the firm’s slashed £485m out its £1.5bn target) and a successful expansion into higher-margin own brand products (up 4.6%) – very likely combined with a little supplier-squeezing – will do the trick.  

Net debt

By exiting large parts of Tesco’s Asian business and selling properties, Lewis has been busily slashing the company’s considerable liabilities. Net debt fell £469m to £3.26bn this half, bringing the total reduction since August 2014 to over £4bn. Interest repayments have plummeted as a result.  

The verdict

Tesco is in a lot better shape than it was two or three years ago. While it’s far from returning to the runaway growth of the Terry Leahy era, its finances and brand are looking healthy compared to its big rivals. Risks remain of course – its acquisition of wholesaler Booker  could be quashed by the Competition and Markets Authority, there’s no sign that Aldi or Lidl are easing up their assault on the groceries sector, and of course Amazon looms over everyone like a fiery sword of Damocles. But apart from that, things are starting to look up. 

Image credit: Mankind 2K/Wikipedia

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