Tesco surges up as Drastic Dave takes action

Tesco is currently up 13% or 24p to 206p as new Chief Executive, Dave Lewis, also known as “drastic Dave” during his time at his previous role at Unilever, took some drastic steps to put the retailer back on course.

He is closing the Cheshunt head office  (moving operations to Welwyn Garden City) and cutting head office overheads by 30% helping to save £250 million in central function costs. The final dividend is axed and 43 mostly smaller stores will close as well as plans for 49 new stores to be put on ice. The company’s cherished final salary pension scheme is also being closed which currently has a £3 billion plus deficit.

Investors were also pleased by Christmas trading which was not as bad as feared. Like-for-like sales fell by just 0.3% during the six-weeks to January 3 and 2.9% for the 19 weeks to January 3rd 2015. This compared to the 5.4% reduction in the previous quarter of 2014. The performance was helped by aggressive price cuts on fruit and vegetables over the festive period and extra employees in store in an effort to boost the amount spent by each shopper.

After the shares touched close to 160p in 2014 after revealing a £250 million accounting black hole as a result of manipulating payments from suppliers to flatter profits, investors seem to be betting that the worst is behind the retailer. It may be far from being out of the woods though, with cut throat competition from the discounters Aldi and Lidl as well as a aggressive price cutting from Asda, Sainsbury and Morrisons. It doesn’t look like the dividend will be restored any time soon with the balance sheet looking stretched and the company has also indicated its intentions to sell its retail data business, Dunnhumby. But Lewis seems to be trying to restore confidence in the City and certainly its trading performance over Christmas seems to have been better than Sainsbury indicating that early efforts by the new man in charge to revitalise UK performance may be starting to pay dividends. It will undoubtedly help that Lewis has managed to hire ex-Halfords MD, Matt Davies, as the new head of the UK business, quite a coup. Its going to be a very competitive year in retailing in 2015 but Tesco’s scale should bode well for the future if the consumer proposition can be reinvigorated through new advertising and a better in-store experience after years of underinvestment.

Contrarian Investor UK

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