Tesco share price rallies as chief Dave Lewis wins over City funds, but Moody’s issues junk rating

 
Kasmira Jefford
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Tesco boss Dave Lewis has begun his turnaround (Source: Getty)
Tesco boss Dave Lewis won the cautious backing of stock-pickers yesterday as he unveiled radical plans to cut hundreds of millions of pounds worth of costs in a bid to revive the fortunes of the troubled supermarket.

Shares rallied 15 per cent, marking their biggest one-day gain in six years. Yet lenders to the retail giant were less impressed, with bonds taking a hit during the day before credit ratings agency Moody’s cut its rating from Baa3 to Ba1 – widely known as “junk”.

Nonetheless, key fund managers are impressed with Lewis’ plan. “The direction of travel and the tone is much more in line with what we think is the best interests of long-term shareholders,” said Nick Kirrage, a fund manager at Tesco’s eighth-biggest investor Schroders.

Paras Anand, head of European equities at Fidelity Worldwide Invest­ment, said: “What will be disappointing for some shareholders is the can­cellation of the dividend, but turnarounds are about prioritisation and it would seem logical to be focusing on putting the business on as sound a financial footing as possible in the short term.”

Tesco launched another wave of price cuts yesterday, lowering prices on hundreds of core branded products by an average of 25 per cent as part of its focus to simplify prices and its range of products. UK like-for-like sales were down just 0.3 per cent over the six week period to 3 January.

“With its greater scale Tesco should be able to offer lower prices than competitors which should then drive better sales performance.

“This does not bode well for competitors as this is a zero-sum game for the market,” said David Moss of F&C Investments said.

Lewis, who was parachuted into the business last autumn, said he would halve capital spending and save £250m a year by axing 43 unprofitable stores, shelving 49 new projects and closing its Cheshunt head office.

The final salary pension scheme will also be closed to new members in February 2016.

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