1,140 views

As Tesco shares jump after it reported another rise in sales, is the retailer out of the woods?

Tesco store
Is it sunny skies ahead for Tesco? (Source: Getty)

Clive Black, head of research at Shore Capital, says Yes.

If you go down to the woods today... well, you won’t find Tesco chief executive Dave Lewis. Two years on from a troubled and tortuous analyst meeting, with the business on its knees, the Tesco boss is reporting that the remedial measures introduced to guide the company out of the woods have been put in the locker.

Indeed, with the tailwind of decent sales across the business and a little more margin and cash coming through, Tesco feels confident to move onto the front foot, highlighting six new guiding principles that are expected to lead to material profit growth out to 2020 – albeit back-end weighted with a 3.5-4.0 per cent margin. Credit where it’s due.

A strengthening operating performance is also the best way for Tesco to deal with still high overall indebtedness (including leases and pensions) where much remains to do. In addition to good news for shareholders, we see a more stable and growing UK market leader as beneficial for the sector as a whole too.

Rob Kniaz, founding partner at Hoxton Ventures, says No.

Tesco has dug itself out of the hole that former chief executive Philip Clarke left in his wake in 2014, but the company is still a long way from being out of the woods.

It has closed some unprofitable stores and sold off Giraffe and other ill advised forays like Fresh and Easy, but that only served to stop the bleeding and put a line under years of compounding bad decisions. It has fought back against Aldi with its competitive new deeply discounted product lines, but is only just beginning to face the onslaught of Amazon in groceries – Tesco’s online sales have actually slowed year-on-year and it’s made unfriendly customer moves to raise the minimum order size, which only plays into the hands of Ocado and Amazon.

And that’s not to mention the looming storm cloud of the ever-growing pension deficit. That shows no sign of abating soon, and has also grown year-on-year. It’s far too early to call Tesco a safe bet, sadly.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles