Tesco – Q1 Results

Postscript Brexit observations…

Tesco’s first-quarter results were good and encouraging. The Brexit vote will of course impact upon UK activities but we are reminded that Tesco still retains a now prospering overseas business which may possibly benefit from a weaker pound.  The shares (last seen) have fallen 4 per cent to 161p.

They remain good value on fundamentals, but Brexit has significant macro economic implications for both the UK and Europe, where the company has business operations. Those implications are unknowable at this stage and have yet to emerge. Clearly, international stocks benefiting from the sharp depreciation of domestic currency are, generally speaking, in principle, more attractive than a company like Tesco with a foot in both the UK and Europe. Which currency will be weaker? The Euro or the pound?

Having noted that the Brexit vote would be a threat in my previous note on Tesco, and having seen the reality of it, I regard Tesco as a ‘hold’ at this stage, on the basis of its recent good performance and those financial fundamentals outlined in my note earlier this month.

Since I last wrote on Tesco equity at the beginning of this month, just ahead of the publication of the first quarter’s results (now published) and the referendum on the EU, the share price had galloped ahead by 14 per cent, from 150p to 171p. My feeling then, having looked through the annual accounting figures, was that the shares were ‘bombed out’ and on the basis of financial fundamentals looked like a share for buying; a view which neatly anticipated this share’s about turn out of a downtrend.

The shares had broken out both on a year and three year chart read. On inspection, the share price is now part way between what looks like a sideways moving trading range of roughly between 140p and 200p. The rally which I believe to be a logical response to underpriced fundamentals was also no doubt, a “relief” rally on the news of an earlier ‘Brexit’ opinion giving “Remain” the lead.

However, two things were coincidentally true: the shares did look cheap and Tesco is the kind of business which would largely benefit from a ‘Remain’ vote because of the uncertainty and volatility a ‘Brexit’ vote would almost certainly introduce. However, Tesco still retains some overseas business after the earlier sale of previous overseas interests.

Q1 results… 

In the UK and the Republic of Ireland, which is now the main focus of interest in Tesco shares, the results were encouraging. ‘Like for like’ sales actually rose by 0.3 per cent on the back of a 2.2 per cent increase in volume sales and a 1.7 per cent rise in the number of transactions going through Tesco checkouts.

That tells us that Tesco has now managed itself back into grocery market contention with the discounters and indicates that at long last it has the measure of them. It shows a significant and positive improvement on the result for the same quarter a year earlier; in Q1 2015 ‘like for like’ sales were actually down 1.5 per cent and remained negative until the always exceptional fourth quarter, which includes Christmas trading. Last Christmas, the management had got itself into a position where it was able to pull out a number of competitive stops so that ‘like for like’ top line sales revenue in the fourth quarter of last year rose 0.9 per cent. Hence, we now have two consecutive quarters in which ‘like for like’ turnover has grown rather than diminished. Moreover, we are told that this has been the case for all regions of operation. When sales revenue in outlets that have been opened for less than a year is factored in, total reported sales rose by more than 1 per cent.

The secrets of success…

In summary, the company has gained sales ground through filling in gaps in brand availability; improving the quality of what it offers its customers; cutting prices; paying greater attention to customer needs; ensuring improved availability of products; and redesigning stores for greater operating efficiency and customer satisfaction.

During March, the management introduced seven new fresh food brands which compete on quality and price and serve to keep customers from shopping elsewhere. Tesco claims that its customers typically save 17 per cent. Evidently, two thirds of Tesco customers have bought into new range brands with a stated 90 per cent customer satisfaction rating.

Overall customer satisfaction is reported to have improved 2 per cent since the beginning of this year and the cost of shopping at Tesco declined by 6 per cent. As part of the promotion of the business, Tesco may not have won an Oscar but does take satisfaction in being awarded the prize and title of Britain’s Favourite Supermarket of the year by customers at the Grocer Gold Awards. Not glamorous perhaps, but better than the reputation it won for itself in earlier years when staff in my local Tesco used loaded trolleys like dodgem cars.

Overseas, ‘like for like’ sales actually increased by 3 per cent with associated volumes and transactions increasing by 2.2 per cent and 1.7 per cent respectively.

For the Group as a whole, ‘like for like’ turnover increased 0.9 per cent, revealing the dominance of UK sales within the group but also indicating that international business is still a significant contributor to total group turnover.

Internationally…

Things are reported to have gone well in both Asia and Europe. Moreover, the results for Q1 represented the fourth consecutive quarter of progress. If you take out the effect of currency movements, sales reportedly grew by 3.6 per cent. In Europe, management have also been working to improve the Tesco “shopping experience” through new lines and promotions. In Slovakia, we are told, there was a “sustained strong performance” and an improvement in Hungary, where Sunday trading is now lawful. However, the company has sold its interests in Turkey.

Corporate actions…

Apart from selling its Turkish Interest, the company has sold UK interests including Dobbies Garden Centres, the Giraffe restaurant chain and the Harris & Hoole cafe business to Cafe Nero. Clearly the company management is thinking hard about the concentration of resources in parts of the business where they will be most effective and with an eye to internal cash generation at a time when prices on average are reportedly down.

CEO David Lewis remarked: “By growing volumes, transforming the way we work together with our suppliers, and further optimising our store operating model we are rebuilding profitability in a sustainable way. I am confident that the improvements we are making for customers are working and will create long-term value for our shareholders.”