Tesco shows signs of stabilisation of UK business, say analysts, despite further profits fall

Tesco: new network planned

Overhaul of large stores remains elusive component of recovery, suggests Roberts

Tesco has posted a 55% fall in half year profits but analysts also suggest the latest numbers indicate further signs of stabilisation at its UK business.

Tesco made £354m in operating profits for the first six months of the year, compared to £779m last year. It recorded a 1.1% fall in like-for-like sales in the first half, compared to a 2% drop in the fourth quarter last year and a 4% decline for the same period in 2014.

David Gray, retail analyst at Planet Retail, said: “As expected, the numbers this morning indicate further signs of stabilisation at Tesco’s domestic unit, with like-for-like declines narrowing on those reported at Q1. There were also encouraging signs on volumes at Tesco, indicating this is a volume-led recovery.

“These figures have firmly cemented the split in the UK mid-market into two camps – Tesco/Sainsbury’s showing signs of recovery and Asda/Morrisons being the laggards. Considering Tesco was in the throes of the accounting scandal just 12 months ago, being in the former camp is an achievement in itself.”

Bryan Roberts, director retail insights, Kantar Retail, said: “As expected, Tesco has recorded a chunky decline in profitability, but has seen first half sales in the UK start heading in the right direction.

“Range resets are leading to improved availability and a degree of sharper pricing, with the maintenance of adequate staffing levels creating improved service levels, if not improved store economics.”

Roberts said he expected a more concerted effort from Tesco on pricing, with perhaps an adaptation of the Price Promise mechanic to offer shoppers more immediate price parity with immediate competitors.

“The discounters remain an irritant, albeit a relatively minor one compared with self-cannibalisation through online and convenience, and although price will play its part in regaining lapsed shoppers, an overhaul of the large store proposition remains an elusive component of a sustained recovery. That said, Dave Lewis has successfully corrected the direction of travel and the stage is set for some meaningful action on value,” Roberts said.

The sale of Korea will be beneficial for debt in the short term, if dilutive in terms of earnings, Roberts added. However, its disposal leaves Thailand and Malaysia looking isolated, while reports of private equity interest in operations in Central and Eastern Europe might undermine today’s assertion that the reshaping of the Tesco portfolio is complete, Roberts said.

Gray agreed: “With Korea already culled, Malaysia is the obvious next market at risk with limited growth potential. However, it is profitable and well-established and so could command a decent price. In CEE, markets like Poland would generate the largest windfall considering its size relative to neighbouring markets and the presence of a string of international operators that could be would-be buyers. Most of these aforementioned markets look safe – for now at least.”