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Tesco Christmas trading results: analyst reaction

As Tesco wields the axe over some of its stores, its HQ and potentially several staff in light of struggling sales and an ongoing profit scandal, Drapers takes a look at the reaction from retail analysts.

Phil Dorrell, director of retail consultancy Retail Remedy, praised Tesco chief executive Dave Lewis for getting more right than wrong.

“For a man parachuted onto the bridge of a sinking ship, Dave Lewis has set about the task of plugging the leaks with aplomb. After a 2014 that was little short of disastrous, the Tesco supertanker was holed below the waterline. Turning it around fully could take years, but the new chief executive has at least begun to staunch some of the losses.

Employing a second analogy, Dorrell added: “Bloated by years of good living, Tesco is like the army of middle-aged men who this month took out gym memberships. While it can only marvel at the lean physiques of the young upstart discounters, shedding its own flab will be slow and painful; and memories of its youthful vigour will count for nothing. But the Christmas numbers, modest though they are, at least suggest the pain will be worth it.”

John Ibbotson, director of consultancy Retail Vision, said that despite the slump, Tesco could soon compete with the success of discounters Aldi and Lidl.

“Tesco needed a completely new direction to thrive in the brave new world of retail and hang onto its market share. It now has one. Previous management lacked the bottle to do what needed to be done. Lewis, it would seem, has bottle aplenty. He has taken some tough decisions. The next step is to communicate this robust plan clearly, to staff and shareholders alike, and then to implement it — rigorously and ruthlessly.”

However, retail analyst Nick Bubb said it was likely a meeting for analysts at 11:30am will focus on the actions Tesco is taking on its heavily-indebted balance sheet.

“We can’t see anything about the expected big UK property write-downs and, handicapped by its massive over-exposure to the hypermarket business, and with the credit rating agencies breathing down its neck, we wonder whether the eventual verdict of the City on today’s Tesco news will be ‘too little too late’.”

Retail analyst at Planet Retail David Gray believes the turnaround of the supermarket will be slow.

“Although UK like-for-like declines have narrowed from the chaos seen at Q2, this comes at a high cost - namely to profits. The words ‘buying success’ come to mind in the wake of a festive performance driven at least in part by widespread vouchering activity.

“If Tesco is to rebuild its battered balance sheet without embarking on major asset sales, it will need to realise plans to cut costs. The fact is Tesco is still reeling from the effects of the accounting scandal, crucially lacking the manpower to helm its largest vessel, namely the UK.”

Fiona Cincotta a senior market analyst at Finspreads summed up the results as “the end of gluttony” and blamed Tesco for failing to adapt to the “structural decline the sector now finds itself in.”

“Dave Lewis is in streamline mode and this is going to sit very well with shareholders. As does the fact the firm has confirmed its full year profit guidance after multiple profit warnings in the last six months. But the heart of their recent failure lies with their inability to challenge the populism of discount shopping. That’s why its now joining the supermarket price war in a more competitive way than ever before, which could have an even bigger knock on effect to the sector, given Tesco size.”

Consultant at Conlumino David Alexander comments that more positive figures for its Christmas trading had been expected but the results show a step in the right direction.

“Though it seems odd to heap praise on a retailer which has still posted negative LFLs during the key Christmas trading period, despite the weak comparatives of 2013, after four years of declining sales in the UK, these results highlight positive momentum.  

“In a market that has been so heavily geared towards value, the focus is on shaping up the business to provide the best deal for customers. 43 unprofitable stores will be closed, while the store building programme is to undergo a significant revision as the capital expenditure budget is reduced to £1bn for 2015/16.

“There is a long road ahead for Tesco, not least in its efforts to rebuild consumer trust in its proposition after successive years of negative press. It is worth remembering though, that sometimes in crisis there lies opportunity.”

Head of JLL UK Retail & Leisure Tim Vallance said element of the outlined plans represent a fightback against discount retailers.

“Dave Lewis has shown bravery, strength and leadership in announcing the closure of the Cheshunt HQ and sale of failing investments, demonstrating his expertise in change and brand management and intention to focus on core business and strengths. A sophisticated, ambitious and innovative consumer focused strategy to boost sales and the morale of the governance board will hopefully help to navigate the firm to less choppy waters after what was an ‘annus horribilis’ for the retailer.”

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