Dave Lewis is having a spring clean. At the back of the kitchen cupboard the chief executive of Tesco has found some forgotten assets, well past their sell-by date.
Tesco said last week that it was closing its Nutricentre health retailing business. Lewis is also preparing to sell Giraffe, the family-friendly dining chain, Sky News reported. Private equity executives expect its Dobbies Garden Centres to also be put on the block; this may be part of a broader clear-out this year.
Giraffe, the Harris + Hoole coffee chain and Euphorium bakery were added by former chief executive Philip Clarke in an effort to breathe fresh life into Tesco's big stores.
The much-maligned Clarke, who was ousted in mid-2014, wasn't too far off the money. Tesco had too much space that it needed to fill – this is part of the reason rival Sainsbury is buying Home Retail Group for £1.4 billion ($2 billion).
But Tesco stores weren't firing on all cylinders. They were too expensive compared with the German no-frills supermarkets, Aldi and Lidl. Meanwhile, the drive to meet City profit expectations by cutting costs translated into dirty shops with inadequate staff. So no matter how many chichi food outlets Clarke added, that didn't stem the tide of sliding sales.
There have been some encouraging signs recently that his efforts are paying off, with sales beginning to stabilize. Tesco's sales fell by 0.8 per cent in the 12 weeks to 1 March, half the rate of decline in the 12 weeks to the beginning of February, according to Kantar Worldpanel, the consumer research group.
But Tesco is by no means out of the woods. Its efforts to take on Aldi and Lidl with a new value range of food products were ridiculed after the brands were named after fictitious farms.
Selling off the non-core businesses is a needed step, and shows that Lewis is focusing on turning around Tesco's core UK grocery business, which still accounts for two-thirds of sales. But it isn't going to move the dial in financial terms. Clarke paid £50 million for Giraffe in 2013. Bankers reckon Dobbies could be worth £180 million to £200 million.
That pales in comparison to Tesco's total borrowings of £17.7 billion as of October, and its £4.2 billion pension deficit. And those figures offer some stark context for forecasts of earnings before interest and tax of £937 million in the year to the end of February 2016.
While earnings before interest and tax are forecast to improve by 2017 to £1.24 billion, that is still just a third of Tesco's £4 billion peak in the year to February 2012. Lewis has warned that any extra profit will be used to invest in cutting prices, which is also needed – like all UK grocers, Tesco will have to continuing growth of discounters Aldi and Lidl, which are opening new stores apace.
Tesco shares have rallied 27 per cent since the start of the year, on hopes that it has turned the corner. They trade on 21.6 times the next 12 months earnings, an almost 30 per cent premium to the sector.
That looks to be a triumph of hope over reality. Lewis's kitchen-cupboard clear out is commendable, but annual results next week will need to show that Britain's biggest retailer is making more fundamental progress on all key fronts: sales, debt and profit.
Lewis's spring clean is really just a light dusting. The harder work remains to be done.
News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.