Tesco first half results: Analysts question whether "Drastic Dave" Lewis has been drastic enough

Catherine Neilan
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"The frantic selling off of Tesco’s family silver has done little more than buy time" (Source: Getty)

Tesco may have beaten expectations for UK sales in the first half of this year, but analysts are warning that the troubled supermarket still has a long way to go if it is to shrug off the many problems facing the UK's biggest retailer.

Tesco's profits fell 55 per cent in the six months to 31 August, but UK like-for-likes were down just 1.1 per cent - better than was widely expected. However, investors are still unimpressed - Tesco's share price was down three per cent in early trading.

The consensus view among analysts is that chief executive Dave Lewis, who has been in the role more than a year, must do more to turn the business around - with some warning that success is not a given.

John Ibbotson, director of the retail consultancy Retail Vision, said: “A year into his tenure, Tesco’s embattled chief executive has lived up to his ‘Drastic Dave’ nickname. Yet on this evidence he will have to be more drastic yet.

“Dave Lewis has not shied away from a ruthless pruning of Tesco’s bloated balance sheet, but this has failed to stop the group’s operating profit slumping by more than half. But the frantic selling off of Tesco’s family silver – including a £4bn deal for its biggest overseas asset, the South Korean unit Homeplus – has done little more than buy time.

“Tesco’s turnaround has begun, but it is achingly slow and there is nothing inevitable about it yet. But after a brutal first year, Dave Lewis’ job still looks considerably safer than Stuart Lancaster’s.”

Shore Capital analyst Darren Shirley warned that there was not enough visibility about Tesco's solvency ratios “We continue to believe that Tesco will need to raise capital and potentially a considerable amount in order to progress without looking over its ‘balance sheet shoulder’,” he said.

“Taking the good ship Tesco to a place where it has a) strong solvency ratios, b) sustainable sales growth and positive operational gearing, c) equity valuation multiples that make the stock look attractive on market comparable ratios and d) recommences a dividend stream that is well covered, attractive and sustainable, seems a very long way off.”

Independent analyst Louise Cooper was similarly downbeat. “Its like-for-likes in UK may be down less than in past, but they're still down,” she said. “Food price deflation is running at 2.8 per cent in the industry year to date and Tesco average basket price down three per cent.

“For all the talk of recovery, this is a really tough industry environment. And there is little chance of it recovering.”

Independent analyst Nick Bubb said the results were "predictably awful".

"Somewhat surprisingly, Tesco has said the portfolio review is now concluded (with the wretched Dunnhumby retained after all) and that further reduction in the £8.6bn debt mountain (excluding the Tesco Bank) can be achieved by driving cash out of the business. That seems to firmly knock a potential rights issue on its head, which would have been embarrassing at this stage of the proceedings, although Tesco had always played down the chances of that, to be fair."

Julie Palmer, partner at Begbies Traynor, said Tesco was “still struggling to see light at the end of the tunnel”.

“With a Serious Fraud Office investigation still casting its shadow, the unrelenting pressure on margins that discounters Aldi and Lidl continue to exert combined with the additional costs it faces from the National Living Wage, the group’s turnaround project still has a long journey ahead.

“Tesco is now faced with the uncertain task of not only having to ameliorate its flat sales growth, but also win back investor’s trust,” she added. “Disposals, store closures and cost cutting will only do so much for the beleaguered supermarket giant, and market insiders will now be questioning whether ‘Drastic Dave’ has been truly drastic enough.”

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