Oct 7, 2015
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Tesco shows signs of recovery after profit collapse

Oct 7, 2015

Britain's biggest supermarket Tesco said it was trading ahead of expectations and outperforming rivals after a move to sacrifice profitability in favour of price cuts and better services won back customers.

Reporting results a week after rival Sainsbury's showed it too was getting to grips with the turmoil hitting the sector, Tesco showed a steady improvement in underlying sales in its home market which enabled it to reiterate its full-year profit outlook.

The cost, however, of rebuilding the business was high.

First half profit slumped 55 percent and the group said it stood ready to increase investment in light of the highly challenging market conditions.

Shares in the group traded 1.8 percent lower at 0735 GMT after a sharp rise ahead of the results.

"We have delivered an unprecedented level of change in our business over the last 12 months and it is working," Chief Executive Dave Lewis said. "The first-half results show sustained improvement across a broad range of key indicators."

After two decades of growth, Tesco lost its way, distracted by an expensive overseas expansion strategy when it needed to respond to the rise of discount grocers Aldi and Lidl in its home market.

It reported an annual loss of 6.4 billion pounds ($9.8 billion) in April, one of the biggest in British corporate history and has struggled to recover from an admission that it manipulated its accounts last year.


Battered by the raft of bad news, Tesco brought in Lewis, a former Unilever executive just over a year ago to turn the business around.

Results on Wednesday showed his changes were starting to have an impact, with an increase in the amount of goods people are buying in store.

Lower prices meant however that like-for-like sales in its home market were still falling, albeit at a lower rate. They were down 1 percent in the second quarter, an improvement from the 1.5 percent decline recorded in the first.

That was at the top end of analyst expectations of a fall of between 1 to 1.5 percent and better than Sainsbury's, Wal-Mart's Asda and Morrisons, which posted like-for-like sales falls of 1.1, 4.7 and 2.4 percent respectively in their most recent quarters.

International sales, which account for more than a fifth of the group total, showed their first like-for-like increase in nearly three years in the first half, helped in particular by a recovery in Poland and Slovakia.

One major Tesco institutional shareholder welcomed the results.

"The stand out for me was the comment on volume and transaction growth," he said, speaking on condition of anonymity. "That suggests that something is improving on an underlying basis."

The one major concern lingering around Tesco will be the state of its balance sheet.

Lewis wants to cut costs, slash debt and rid the firm of its junk credit rating. However, the company indicated on Wednesday that the recent sale of its South Korean unit for $6.1 billion would be its only major disposal for now.

It said it would retain its Dunnhumby data unit after a planned sale flopped. Lewis said further debt reduction would come from better cash generation from its retained businesses.

"There is clearly much more to be done, but the progress to date in such a short period of time is laudable and may even result in the market consensus of the shares as a strong hold coming under some positive pressure," said Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers.

$1 = 0.6549 pounds


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