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Dividend proves Tesco is confident on future

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At various points during the last three years Dave Lewis, the Tesco chief executive, has been invited to speculate whether the grocery giant has finally turned a corner.

On each occasion, even where there has been evidence of a recovery, he has declined.

Now, however, Mr Lewis has delivered the most concrete proof yet that he is confident about the future.
Tesco is to resume paying dividends for the first time since the departure of Mr Lewis’s predecessor, Philip Clarke in 2014, which was followed by a top-to-bottom overhaul of the business by the new boss.
Admittedly, the half-year dividend of 1p-a-share will not represent wealth beyond the dreams of avarice for the 200,000 or so individuals who own Tesco shares: the supermarket’s pay-out at this stage in both 2012 and 2013 was 4.63p and even in 2014, just as it was becoming apparent that the wheels were falling off, it managed a 1.16p-a-share half year dividend.
:: Tesco first-half profits surge but sales growth stutters
But this is, nonetheless, a hugely symbolic moment in Tesco’s turnaround.
It has been made possible by a performance that was significantly better than the City had been expecting.
During the six months to 26 August, sales rose by 3.7% to £28.3bn, significantly ahead of the £27.8bn that analysts had pencilled in.
And a greater proportion of those sales is falling to the bottom line.
Operating profit before one-off factors rose by 27%, to £759m, again substantially better than the £713m or so that the market had been looking for.
How has Tesco done this? Quite simply, by growing sales and bearing down on costs.

Image: Dave Lewis took over as Tesco chief executive in 2014
The latter reflects an intense effort to make the business more efficient and which has seen thousands of jobs, particularly head office functions, shed during the last three years.
That has enabled Tesco to invest more in the stores and in ensuring prices remain competitive and which, in turn, helps generate more sales.
The proof of this is that, in the core UK stores, customer transactions rose by 0.4% during the period while volumes – the amount of stuff being sold – was up by 0.3% and, in fresh food, by 1.5%.
In other words, more people are shopping with Tesco – 300,000 of them, apparently – and existing customers are shopping more with Tesco.
Mr Lewis claimed that, with food price inflation having begun to tick up again during the last year due to the drop in the pound, Tesco has been absorbing those higher costs more than its rivals.

It says food price inflation in its stores was one percentage point lower than that of the competition. However, at the same time, operating margin improved.
For each £1 worth of sales, Tesco made 2.7p worth of profit during the period, up from 2.2p in the same period a year ago. That demonstrates clearly that Tesco is becoming more efficient.
The results statement is also full of interesting little nuggets that highlight the sheer size and scale of this company and the extent to which Mr Lewis and his colleagues can pull levers to shape performance.
For example, Tesco raised some £175m from property deals during the period, including £55m alone from selling the freehold of its superstore in Hackney, north-east London, to the local council.
And to many people’s surprise, the pension deficit at the UK’s largest private sector employer has fallen, although this largely reflects changes in accounting treatment rather than any dramatic improvement.
So there was a lot of good news in this statement. But there is still a huge amount more to do.

Image: The UK grocery market remains brutally competitive
Mr Lewis is aiming to rebuild margins to between 3.5-4% and wants to take a further £1.5bn out of costs.
All this is with the aim of lifting cash flow in order to increase the dividend over time and, of course, to continue investing in price.
The hard discounters, Aldi and Lidl, are no longer enjoying the runaway growth that once they did but they will continue nipping at the heels of the Big Four.
Sainsbury’s acquisition of Argos looks to have paid off and is delivering more traffic into its stores while Morrisons, under Tesco old boy Dave Potts, is also providing sterner competition than at any point in the last decade.
Co-op has also raised its game in recent years while Asda, owned by the world’s largest retailer Wal-Mart, is also not to be underestimated. In short, the UK grocery market remains brutally competitive.
Meanwhile, there is always the threat of unknown unknowns, such as the revelations last week concerning a supplier of chicken to Tesco and some of its rivals.
Mr Lewis was at pains to stress this was not a repetition of the horsemeat scandal of a few years ago.
Above all, there is the challenge of completing the £3.7bn takeover of the cash-and-carry giant Booker, which is currently being investigated by the Competition and Markets Authority.
This is a deal that could potentially transform Tesco’s fortunes but carries a good deal of execution risk.
So, while the latest results represent the most tangible proof yet of Tesco’s turnaround under Mr Lewis, there is still a lot more for him and his colleagues to do.

Source: SKY News Feed