How seven City analysts reacted to Tesco results

 
Emma Haslett
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Shares fell on this morning's results (Source: Getty)

Shares in Tesco fell this morning, after confusing results showed pre-tax profits had jumped 30 per cent - although another measure showed they had fallen 30 per cent.

Analysts worried about the company's debt, which may have fallen 27 per cent to £3.7bn - but could shoot up if its massive, coincidentally-priced £3.7bn Booker acquisition is given approval.

Here's what they had to say:

1. Not out of the woods yet

"Things are looking better at Tesco, but the supermarket’s profits have been diminished by the fines and compensation it has to fork out for mis-stating its profits in 2014. Operationally the company is staging a recovery but it’s not out of the woods just yet.

"With the sands of retail shifting, and Tesco only just starting to turn performance around, big questions hover over the proposed takeover of Booker Group. The logic for the deal lies in providing a growth engine for Tesco in the restaurant and hotels foods market, but investors are asking whether Tesco should walk before it starts to run. However, Sainsbury also took a bold step at a precarious time when it took over Home Retail Group, and to date that move has paid off, as Argos has been keeping group sales ticking over."

- Laith Khalaf, Hargreaves Lansdown

2. Tesco is a retailer with its finger on the pulse

"It’s a far cry from the £4bn Tesco earned 5 years ago but it is still a very healthy improvement on last year's profit. Cost cutting will continue to feature in Tesco’s outlook: cutting 24 hour opening, switching to twilight filling. However we are spotting cracks in store standards and availability as a result. Lewis must be careful not to cut too deep too quickly.

"In our opinion adding Booker to the Tesco stable is a good long term strategy. Far from being a distraction to the UK core business, it would be beneficial. If anything, pulling the plug on the Booker deal could be more distracting.

"Tesco is a retailer with its finger on the pulse. A clear sense of direction and a team that is fuelling the engine will be giving the competition cause for concern."

- Phil Dorrell, Retail Remedy

3. Discounters are still its problem

"This is the first time in nearly seven years that we are seeing [like-for-likes] shining again given the tough competition in this space. If the firm continues at this pace, we see it resuming its dividend as soon as this year. Inflation is still the major problem for the company. The firm cannot increase the price too much because that will drive their customers back to Aldi and Lidl.

"Something which is still making a major dent on the firm's balance sheet is the massive payment for its historic accounting scandal. The firm is determined to put this bad news behind it and the potential merger with Booker is on its dashboard. The combined group would have more outlets and would occupy nearly 25 per cent of the market."

- Naeem Aslam, Think Markets UK

4. Battles on the horizon

"Tesco can be proud to say that 80 per cent of all shoppers claim they found staff helpful when visiting Tesco’s stores. Tesco can also successfully put the accounting scandals of the past behind them having settled legal affairs in the past 30 days. Now, Tesco will begin to fight all of its battles on the front foot.

"The celebrations are well-earned but will need to be short-lived. Tesco’s management will soon fight battles on new fronts.

"The largest battle the company will face is the upcoming anti-trust reviews related to the proposed merger with Booker Group Plc. Management will spend considerable time, money, and political know-how to convince authorities and rebellious shareholders that the merger is good for the British public and healthy market competition.

"The final battle Tesco will face will be its own cost-base. Rising costs will be relentless due to increased labour costs, business rates, and rising fuel prices. The company has taken steps to reduce managerial staff, particularly deputy store managers in Express stores, close distribution centres, and reduce opening hours at 24-hour stores.

"The question for 2017/18 is whether these cuts will be enough to lift sales and continue excellent progress in profitability. The fact that Tesco delivered £1.3bn in operating profit in 2016/17 and grew like-for-like sales for the first time since 2009/10 is reason enough to believe it may be possible."

- Ray Gaul, Kantar Retail

5. In safe hands

"Tesco remains on quite a long recovery journey given how far the business fell from grace earlier in this decade. Whilst this is so, therefore, we take genuine encouragement from the ongoing progress that has been delivered by chief executive Dave Lewis and his team; we continue to remind Tesco investors that Lewis delivered wonders in keeping a chaotic situation upright when he joined the business, which he then stabilised so now allowing growth-on-growth to be reported in 2017.

"The proposed Booker merger does not move our dial on Tesco; we do not see it as being transformational to supermarket group’s prospect. What the process does do, however, is freeze or fossilise the Tesco investment story for a while until it becomes clear as to what the CMA decides to do. Once we have more colour on clearance, any remedies or otherwise, we shall reflect upon how medium-term investment thesis for Tesco looks. We continue to suggest that investors will also benefit from patience."

- Clive Black and Darren Shirley, Shore Capital

6. Beware European regulation

"Together with a near elimination of shop floor inefficiencies like availability, and further inroads in range simplification and ‘promotional participation’ down by a third, Tesco has safely retained the impression of having entered an era of being a much more tightly run ship, whose nimble and reactive use of data has quietly become the industry standard, again.

"Niggles are of course inevitable in an environment that the group highlights as “highly competitive” and the intensity of that competition knows no borders, notes Tesco. It is linking a 12.5 per cent operating profit decline at constant exchange rates in the international division to “intense competition” in Poland, where the group was forced to double down efforts to invest in price, hitting Central Europe profits.

"The group also offers no relief for the outlook with respect to a retail tax in Poland (suspended pending an EC investigation) having flagged the issue earlier in the year. Tesco’s cover-all caution about “legislative changes” in its European markets is reiterated in the its preliminary full-year report, which is direct enough guidance to expect the central region in particular and perhaps International in general to remain a drag at least into the second half of its financial year."

- Ken Odeluga, City Index

7. Margins will stay squeezed

“As a result of net debt falling more than estimates and a reduction in the pension deficit, Tesco was given the confidence to announce its intention to resume dividend payments in the financial year 2017/18.

“Despite the good numbers... fierce price competition and promotions are likely to remain a squeeze on margins for some time and the revised strategy is going to take time to implement. Investors backing the new management will have to be patient although the signs of improvement in recent results are encouraging. As a result, we continue to recommend Tesco as a ‘hold’.”

- Ian Forrest, The Share Centre

Read more: Up to 3,000 jobs at risk as Tesco cuts down opening hours at 69 stores

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