'Drastic' Dave Lewis, Tesco's (TSCO) new boss, must be pleased that his turnaround strategy, unveiled alongside reasonably promising Christmas trading figures, was well-received by the markets. The news resulted in Tesco's share price jumping more than 13 per cent in one day.
The trading statement did reveal a notable improvement in UK like-for-like sales between the third quarter (down 5.1 per cent in the three months to 22 Nov) and the Christmas period (down 1.2 per cent in the six weeks the 3 January). But it's worth comparing these figures to last year, when the corresponding declines were a 1.6 per cent in the third quarter and 2.5 per cent over Christmas. This comparison isn't nearly as flattering. Group-wide, LFL sales over Christmas fell just 0.6 per cent, compared with a 2.8 per cent declined last year, while third-quarter sales worsened, down 3.8 per cent, compared with a 2.5 per cent decline in the third quarter of 2013.
Whatever you think of the results, after four months in the job, it's hardly plausible to think that Mr Lewis could have had any meaningful effect on the outcome. To his credit, the turnaround plan looks solid, but the measures he is taking (as discussed in our initial coverage) weren't exactly a surprise and certainly not enough to warrant such a huge surge in the share price. We suspect the lion's share of the rise was technical, as investors who had short positions on the stock sold their shares when it looked as if trading had stabilised. That would explain the equally astounding increases in the share prices of listed peers Sainsbury (SBRY) and Morrison (MRW).
Morningstar analyst Ken Perkins reckons there is potential for a large operating profit jump were traffic and volume trends to stabilise and eventually turn positive, but he cautions that Tesco still faces a number of structural headwinds: "While recent results provide reason for optimism, we only suggest Tesco to long-term investors with a high risk tolerance. The UK grocery market is mature, oversupplied, and highly concentrated." HSBC retail analyst David McCarthy is more positive, saying the results were materially better than he had expected: "Big decisions are being taken and many important strategic initiatives have been launched. We believe Tesco has the scale, skills and management to be the long-term winner in the UK."
