Tesco (LON:TSCO) has reported first half results. Operating profits have come in ahead of expectations at £596M. Pre-tax profit fell by 28.3% in the first half. UK comparable sales grew 0.6%. Tesco plans capital expenditure of £1.4bn per year to support the turnaround. The supermarket is targeting 3.5-4% operating margins with £1.5bn in operating cost reductions. The pension deficit has grown to £5.9bn from £3.2bn. Asset sales and restructuring costs continue to impact performance.
The turnaround plan put in place by Tesco’s chief executive Davis Lewis of price cuts, simpler product ranges and better customer service all appear to be getting the checkout cash registers ringing.
Tesco had hit the ground running in the lead up the results. Shares have risen as much as 20% year-to-date culminating in Kantar data showed the best 12-week sales performance in over two years.
Customers appear to be returning to the UK’s number one grocer in a sign it is regaining trust over two years after the firm misstated its profits in what became a huge accounting scandal. The accounting scandal proved the straw the broke the camel’s back for the ‘Big Four’ supermarkets in the war against discounters Aldi and Lidl.
Tesco has invested heavily in reducing prices in the last two years, and has gradually reduced its customer exodus to the discounters Aldi and Lidl. Both the German chains are still rapidly gaining market share but less of it is coming from Tesco, with Walmart-owned Asda (NYSE:WMT) notably falling out of favour.
In practise, many customers don’t trust the big companies, with accounting irregularities and data breaches occurring all-too-often. But money pressures at home force many families to shop wherever the best price is available.
Given that it was an accounting- rather than perhaps a food scandal, Investors have found it a little harder to forget than customers. Shares still remain a long way off the highs of previous years. The charges against three former Tesco executives in September has brought the accounting scandal back to the surface.
Part of the reason shares are not fully-reflecting the sales turnaround and future growth is uncertainty around the dividend, which was suspended in 2015. Tesco’s rising pension deficit eats into the newly minted free-cash flow.
The Results show and overall improvement and the outlook for Tesco continues to improve, though the rising pension deficit could delay a re-instatement of the dividend.
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