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Tesco First-Quarter Results – What The Analysts Said

Published on Jun 26 2020 12:19 PM in Retail tagged: Trending Posts / Tesco / Shore Capital / GlobalData / What The Analysts Said / AJ Bell / Asktraders.com

Tesco First-Quarter Results – What The Analysts Said

Tesco has posted a 8.2% increase in like-for-like sales in the first quarter of its financial year; a period that was dominated by the coronavirus crisis.

Commenting on the retailer's performance, chief executive Dave Lewis said, “Through a very challenging period for everyone, Tesco colleagues have gone above and beyond, and I’m extremely proud of what they’ve achieved."

Here's how leading industry analysts viewed its performance:

Russ Mould, AJ Bell

“There will be a time when we look back at the pandemic and realise that Tesco went above and beyond to keep the nation’s fridges and pantries stocked.

“In the past few months it has managed to greatly increase the number of homes to whom it can deliver online orders, keep its shelves stocked with the items everyone has needed, and provide jobs to many people who suddenly found themselves out of work.

“The rewards of these efforts are laid out in its latest trading update which shows big growth in food sales and a surge in online business which is likely to have resulted in more households switching their loyalty to Tesco as the supermarket where it is generally easier to get delivery slots than its rivals.

“It shouldn’t really matter that profits have been held back by higher costs as this issue is likely to be outweighed by the longer-term benefits Tesco can enjoy if has managed to attract customers from rivals and secured their future loyalty.”

Nigel Frith, www.asktraders.com

"Investors have been trying to figure out whether the coronavirus crisis is net positive for Tesco or not? Today’s results go some way to help filling in the blanks. On the one hand sales jumped 7.9% for the first 13 weeks of lockdown. Unsurprisingly, online sales surged by 48.5% as shoppers stayed away from stores and ordered food from home. However, costs have increased, and Tesco Bank is proving to be a weak link.

"Increased costs have also been an important part to the coronavirus equation at Tesco and the supermarket said that it expects COVID-19 related costs to total £840 million for the year.

"Tesco Bank is proving to be more of a concern with losses in the region of £175 million to £200 million expected. Provisions for potential bad debts have been increased as the economic outlook for the UK looks bleak. As Britain enters into its deepest recession for 300 years, it goes without saying that bad loans will increase and significantly. Add int the mix the historically low interest rate squeezing margins and its safe to conclude that it’s a hugely challenging climate for banks."

Clive Black, Shore Capital

"We like Tesco's current approach and strategy, which we think is right for the times it now operates. We are sorry to see Dave Lewis leave, he has been an exceptionally effective CEO, but he yields to Ken Murphy, his replacement, an excellent deck of cards to play; Tesco is also blessed with a strong Chair in John Allan and the brilliant Charles Wilson too.

"We like the Group's structurally strengthened balance sheet, to be notably augmented by the Asian proceeds, which deals a notable annual cash flow benefit (c£285m) with the bolstering of Tesco's pension position; the proceeds of exiting Poland need to be added to cash balances too.

"The re-engineering of the balance sheet, that is de-leveraging, permits greater visibility around Tesco's scope to use free cash flow to benefit shareholders be that special distributions, an ongoing buy-back, dependent upon the share price of course, and options to bolt-on acquisitions.

"As such, with effective operations across its divisions, ongoing work on customer innovation, lower operating costs and focusing upon profitable activities (remember Tesco Direct and Tesco Polska) we continue to see Tesco as a cash compounder; one that can deliver steady revenue growth, firm trading margins, negative working capital and so strong cash flows from operations, which with disciplined capital expenditure that should fall to c£1 billion per annum, strong free cash flows."

Thomas Brereton, GlobalData

"In many ways, Tesco has spent the last five years unknowingly preparing for COVID-19. Its concentration on improving profits meant it has withdrawn from its non-food UK proposition, as well as more recently selling off international divisions in Poland and Asia (although finalisation expected in H2) in a bid to protect the UK food mothership.

"Somewhat unfortunately for investors, Tesco forecasts that these sales will not benefit retail operating profit; given the additional costs incurred over the period (predominantly payroll costs for new employees), it expects retail EBIT growth for FY20/21 to be broadly in line with the prior year. However, the slick supply chain that Tesco had developed prior to coronavirus will again put it in good stead against competitors that had prioritised investment in other areas.

"And these benefits will extend past the foreseeable length of the outbreak. The UK is almost certain to enter a recession that will take its toll on consumer wallets, and for the next 18 months or so reducing grocery expenditure will be a priority for many."

© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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