17th April 2015
Next week, investors in supermarket giant Tesco will see whether the new boss ‘Drastic Dave’ has managed to halt the two year nightmare they have endured.
Full year 2014 results to be reported next week will reveal whether Dave Lewis, the chief executive brought on board to stop the sinking of the ship, has succeed.
The recent share price recovery indicated that his plan is already working, with investors emboldened by a restructuring programme. However, Michael Hewson, chief market analyst at CMC Markets, is not totally convinced.
‘We still have no clear idea what the supermarket chain is planning to do with the assets that it no longer needs from the store-closing programme, announced in January,’ he said,
‘The recovery in share price since January is no doubt reflective of a broader sector recovery, rather than any confidence of bad news already being priced in.’
Under his plan, Lewis has already removed the final dividend and closed 43 loss-making store, with a further 49 closures in the pipeline. The closure of Tesco HQ in Cheshunt saved £1 billion and may have had a short-term effect on the share price, said Hewson.
He added: ‘The rebound appears to have been a broader recognition that the sell-off since the beginning of January 2014 may have been somewhat overdone for the sector as a whole.
‘That being said, the share price recovery since the beginning of January this year has seen Tesco outperform its peers, but this merely reflects the fact that the shares had been sold off that much more aggressively.’
Hewson said investors needed to consider the effect the restructuring would have on Tesco’s property portfolio, with some estimating the extent of the write-downs to be as high as £3 billion, ‘though the more conservative analysts put the figure around £1 billion’.
One thing that Hewson can be sure of, is that despite the recovery in the share price, the supermarket sector ‘is likely to continue to face squeezed margins over the course of the next 12 months given the continued visibility of Aldi and Lidl’ and the on-going price war.
‘The latest retail data from the British Retail Consortium in the lead-up to Easter bears this out, with strong growth in terms of total food sales for March, but this growth is likely to have been fuelled by the sharp drop in food prices over the course of the last few months, which could well translate into reduced profits,’ said Hewson.