Tesco is slipping back despite a positive note from analyst Bruno Monteyne at Bernstein, who said the recovery under new chief executive Dave Lewis was continuing despite this not being reflected in the share price. He said:
Recent Kantar data has shown that Tesco’s excellent Christmas trading momentum has taken a step back. Does this mean that the recovery has stalled or that Plan Dave is no longer working? Alternatively, is it simply that the recovery was never going to be completely smooth and that some of it is self-inflicted (i.e. price cuts)? Evidence points to the latter, Tesco appears to be moving onto own label price cuts and, put into context, the current market share declines of 30 basis points year on year are still amazingly better than the 150 basis points of losses seen in 2014. Dave Lewis has consistently claimed that the path to recovery has only just begun; and at the moment he is making the right steps; but if he needs any fresh ideas then his board meetings can effectively become strategy meetings. The board level appointments under Dave Lewis have brought substantial retail and consumer experience at the board level (with alumni from M&S, Ikea, Compass Group and Dixons all added), and likely further appointments to come. Just over a year ago....we set out the fundamental weakness that Tesco had in its board: that outside of Philip Clarke (the then chief executive), there was very little retail experience. We concluded that if the then plan failed (it did) there was little potential for a new strategy being found. This is not the case today, if the plan needs fresh ideas (which it doesn’t yet), then there are plenty of sources of these ideas, giving us further confidence in Tesco’s turn-around.
Tesco’s new chief executive has already delivered much more much faster than any of us would have expected the day he started (1 September). The despair and excessive pessimism from November last year disappeared when Tesco delivered an all-mighty come back during Christmas despite having 8 senior executives suspended during an investigation for accounting irregularities. The discussion now rightly is about ‘how high can long term margins be in the UK’, ‘how long will it take’ and ‘what are the odds of success’. The turnaround will take longer than 7 months and the recent sell off we have seen is because Drastic Dave is so far only willing to admit to aspire to about 160 basis points of margin improvement (our interpretation of the guidance given). This provides a good re-entry point into the Tesco value case. We re-iterate our outperform with a price target of £2.85.
Tesco is currently 0.35p lower at 227.05p in a FTES 100 which - although off its best levels - is still in positive territory.
