Results day at Tesco (TSCO) and a new chief executive leading the presentation of the numbers. Ken Murphy took over last week from 'Tesco Dave', David Lewis, the man who pulled the UK's largest food retailer back from the brink of an accounting scandal and multiple missteps of direction. Apparently it is 'Serving shoppers a little better every day' and that it is able to say this is as 'Tesco Dave' did a pretty good job. The update for the six months to the end of August noted that 'over a million customers more loyal to Tesco...Net switching gains from Aldi for first time in over a decade...(and) Online capacity doubled in five weeks (as Covid-19 hit)'. This is far from shabby at all...
Headline sales were up 6.8% year-on-year but all the action was led by the UK & ROI geographic area, which today - after the announced disposal of the company's Asian business - represents well over 90% of the continuing business. Operating profit at a constant exchange rate was less strong at a headline level being down over 15%, but dig into the numbers and that was all about Tesco Bank sliding into a loss ('increase in provision for potential bad debts...reduction in income across activities') and the ongoing Central European business making a chunk less profit ('temporary mall closures...Hungarian sales tax introduced in May'). However, the core UK & ROI business saw operating profit rise 6.2% year-on-year. And that's why the dividend was up 20% odd. And the ongoing Asian business disposal is why net debt is anticipated to fall from near £16 billion to just about £13 billion even including lease and pension liabilities and a material anticipated reduction in share capital. That's why the company can make comments like 'targeting leverage of c.2.5x Total indebtedness/EBITDA' which, given the all-in nature of the debt comments and the general nature of a food retail business, is not too shabby.
Of course, there were some evolving underlying circumstances as noted by the observation that 'basket size up 56.2%...shopping frequency down (31.0)%'. But factor in the net £200 million of extra Covid-19 compliance costs (higher employment costs, PPE expense etc.) minus any rate relief and the company's profit progress in the UK looks pretty heroic and reflective of a successful recent turnaround. Thanks again Tesco Dave! This is reflected in brand profile scores across quality, value, reputation and satisfaction which have pushed strongly up over the last few years. So there's the backdrop – and a most workable one it is. And what does Mr Newbie think?
Well after a week in charge he opines that he is looking for a 'relentless focus on doing the right thing for customers...integrating our passion for nutrition and sustainability into everything we do...a disciplined approach to managing cash and capital allocation...seeking out profitable growth through serving our customers a little better every day' aka a whole load of waffle and ramble. He's got a great backdrop, a share trading prospectively on a mid-teens earnings multiple and chucking out the equivalent of a 4% odd dividend yield. No pressure Mr Murphy... Frankly, we just don't know how he will get on. Such is the risk with any big management change. All you can say is that if he is going to bog up the Tesco turnaround then that's something for 2021-2. Tesco shares today retain their recovery scope back to 250p...which is why I retain a position. But guess what? I'm keeping a close eye on the new guy. You should also judge someone by their actions and not just their words or their CV after all. The same goes for the incoming new CFO from Tate & Lyle (TATE). All change at Tesco should probably initially be more of an evolution than a revolution. Thanks again Tesco Dave.
Filed under: Tesco, Motorpoint, Adamas, Union Jack Oil, Gulf Marine Services, easyJet, Imperial Brands
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