October 4, 2017 / 10:16 AM / a year ago

Breakingviews - Tesco is spinning its wheels to get nowhere fast

LONDON (Reuters Breakingviews) - Three years into a turnaround, Tesco’s management team has displayed more skill than luck. Chief Executive Dave Lewis has boosted margins at Britain’s biggest supermarket, shrunk the pension deficit and cut debt. The first dividend payment in three years confirms the recovery. Yet threats from inflation, weak consumer demand and online rivals have Tesco shares stuck in a rut.

Tesco Group Chief Executive, Dave Lewis speaks at an analyst presentation in London, Britain, April 12, 2017

The UK’s largest grocer by market share is in better shape than it has been in years. On Wednesday, the company said that it will pay an interim dividend of 1 pence per share – the first since it scrapped payouts to save cash in early 2015. Tesco’s operating margin of 2.7 percent in the 26 weeks to Aug. 26 is still less than half what it managed just six years ago, but shows the company is on track to hit the 3.5 percent to 4 percent target Lewis set a year ago. Tesco’s balance sheet is also in better shape. Net debt, which stood at 7.5 billion pounds when Lewis took charge in 2014, is down to 3.3 billion pounds. And an independent valuation has reduced the group’s net pension deficit by almost 60 percent to 2.4 billion pounds.

Still, the company is having a hard time getting much credit from investors. Tesco shares have been at a virtual standstill for three years and were down 2 percent in early trading on Wednesday. The stock still looks expensive, trading at 16 times forward earnings, compared with 12 times for closest rival J Sainsbury.

This gloom is largely due to factors beyond the control of Lewis and his team. UK inflation is running at close to 3 percent, squeezing real earnings. To keep its volume-led recovery on track, Tesco has to do more than rivals to shield shoppers from price hikes. Amazon’s recent purchase of Whole Foods is also an ominous development for Tesco, which has a 15 percent share of global online food sales according to Bernstein estimates.

Any sign that discount retailers Aldi and Lidl are slowing their invasion of the cut-throat British market, or that Amazon’s push into groceries is faltering, would be good for Tesco. Until then, the company will be spinning its wheels to get nowhere fast.


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