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april 22 tg tesco 223p


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april 22 tg tesco 223p

  1. 1. UK Equity Ideas Sales Offices: London: +44 20 7321 2508 Geneva: +41 58 816 86 70 Madrid: +34 91 701 57 03 Hong Kong: +852 31 98 68 60 Analyst: Tim Green +44 (0) 20 7878 4185 Website: 22 April 2015 One Tesco swallow not enough to make a high-quality summer Tesco’s new chief executive Dave Lewis has worked hard to beat Tesco (223p) into some kind of shape during his first seven months in the job. Given the huge legacy of issues he has had to deal with, as well as his desire to take some radical decisions like shutting down the awful Cheshunt HQ and moving it to Welwyn Garden City, he has made a good fist of it so far. Throwing money and effort into first getting service and availability up to scratch, so that he can get maximum leverage out of price cuts all makes good sense. This has duly led to his first swallow, in the shape of the UK LFL volume growth (1.2%) over the final quarter of last year, the first positive UK volume figure after four years of declines. In tandem with this, UK transactions have also edged into positive territory during the final quarter, for the first time in at least a couple of years. This focus on volume-led recovery fits with the traditional wisdom of saving a supermarket chain, as was ably demonstrated by Justin King when he had to pick up the pieces as the new chief executive of Sainsbury around a decade ago. Prices will be what they will be and the outlook for them is particularly uncertain at a time of commodity deflation and supermarket price wars. Tesco’s UK LFL growth was still 1% negative in the last quarter. So one needs to fix on something more immediately achievable than an absolute sales figure, even if one hopes that the latter will come sooner rather than later. However, there was something lacking in today’s full-year results presentation. Whilst Mr Lewis put a lot of emphasis of the volume-driving powers of better service, availability and price, one word was curiously absent in the presentation: quality. As far as we can see, the word did not appear once in either the results release or presentation slides. Now our comment may be unfair, since plans to continue a full series of range reviews were highlighted; but the emphasis here was on cutting the number of products. We agree with the company that the number of products was excessive and that cuts are right, without losing the numerical, choice advantage that should give added appeal, at least when compared to the much smaller ranges of Aldi and Lidl. But surely quality deserves a mention too? Perhaps, for competitive reasons, Mr Lewis is not giving too much away. The emphasis on “reinvestment, reinvestment, reinvestment” in the customer offer - Mr Lewis’s words - must surely include quality, we assume. Nevertheless we are rather surprised at its apparent omission. By contrast, it was clear that a large part of the reinvestment plan would be lowering prices, as Mr Lewis believes that Tesco’s prices are still too high overall. However, Justin King placed the improvement of product quality at the centre of his successful, sales-led recovery plan. Sainsbury may be different from Tesco but quality matters. Even a look at the accelerating success of Aldi and Lidl shows that higher quality has been a key component of their growth, not just low prices. In their case, there has been a sharply increased emphasis on British sourcing, for example in meat products, which has played a key role in upgrading their own brand offer and its appeal. Cutting prices is one thing and it obviously boosts volumes; but lower prices must also be offset by customers
  2. 2. UK Equity Ideas Sales Offices: London: +44 20 7321 2508 Geneva: +41 58 816 86 70 Madrid: +34 91 701 57 03 Hong Kong: +852 31 98 68 60 Analyst: Tim Green +44 (0) 20 7878 4185 Website: trading up, paying higher prices for higher quality, own brand products. This is a must for a broad-range operator like Tesco. One final thing to watch for, briefly alluded to by Mr Lewis in his presentation: lower prices for food, and more recently petrol, have given customers a wodge of extra cash but they have decided to spend it elsewhere, not at Tesco. Namely on holidays, paying down debt or - we would add - on a host of things like cars and Sky TV subscriptions. Indeed, look at how Sky, the young usurper, has reached level pegging with Tesco in terms of market capitalisation – an unthinkable possibility perhaps before Tesco’s travails. Therefore, Tesco has an urgent need to become much more relevant again to the consumer. Although Tesco Bank is a complementary part of that effort and a more focused effort on food will help, there is still much to prove. That doubt may also need to be more fully discounted in the share price. There are compounding doubts to deal with, such as sorting out the weakness in Asia and continental Europe and possible extra charges related to the pension scheme. Tesco should be fixable - in the UK at least - and Mr Lewis may be the person to do it. However, we are not yet drawn to consider backing such an assessment at the current share price. Tesco and Sky’s market cap converge (to around £18.5bn) Source: FactSet Tim Green UK Equity Commentator T +44 (0)20 7878 4185 F +44 (0)20 7930 4068 Email: MIRABAUD Securities LLP 33, Grosvenor Place London SW1X 7HY
  3. 3. UK Equity Ideas Sales Offices: London: +44 20 7321 2508 Geneva: +41 58 816 86 70 Madrid: +34 91 701 57 03 Hong Kong: +852 31 98 68 60 Analyst: Tim Green +44 (0) 20 7878 4185 Website: T +44 20 7321 2508 F +44 20 7930 4068 This document provides commentary on financial markets and/or specific securities and does not constitute investment research or an investment recommendation, as defined by the FCA Rules. Mirabaud Securities LLP – Member of the London Stock Exchange. Authorised and regulated by the Financial Conduct Authority under reference number 489643 TREATING OUR CUSTOMERS FAIRLY - feel we're not doing this, then contact with any concerns or issues you may have. Important legal and regulatory information relevant to this communication can be found at messaging-disclaimer IMPORTANT INFORMATION ISSUED BY MIRABAUD SECURITIES LLP, A LIMITED LIABILITY PARTNERSHIP AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. A MEMBER OF THE LONDON STOCK EXCHANGE © Mirabaud Securities LLP. All rights reserved. Any unauthorised use or distribution is strictly prohibited. This document has been prepared and issued by Mirabaud Securities LLP or its associated companies and has been approved for publication in the United Kingdom by Mirabaud Securities LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority. This document is distributed in Hong Kong by Mirabaud Securities (Asia) Limited, which is authorised as a licenced dealer in securities and regulated by the Hong Kong Securities and Futures Commission. Neither the information nor the opinions expressed in this document constitute or intend to be an offer, or a solicitation of an offer, to buy or sell relevant securities (i.e. securities mentioned herein and options, warrants, or rights to or interests in any such securities). The information and opinions contained in this document have been compiled from and based upon generally available information which Mirabaud Securities LLP believes to be reliable but the accuracy or completeness of which cannot be guaranteed. All comments and estimates given are statements of Mirabaud Securities LLP’s or an associated company’s opinion only and no express or implied representation or warranty is given or to be implied therefrom. All opinions expressed herein are subject to change without notice. This document does not take into account the specific investment objectives, financial status, attitude to risk or any other specific matters relevant to any person who receives this document and should therefore not be used in substitution for the exercise of judgment by such person. Neither Mirabaud Securities LLP nor any associated company accepts any liability whatsoever for any direct or consequential loss arising from the use of its advice or research publications save where such loss arises as a direct result of Mirabaud Securities LLP’s or an associated company’s negligence. Research publications are issued by Mirabaud Securities LLP or an associated company for private circulation to eligible counterparties, professional clients and professional advisers, (“its clients”), and specifically not to private or retail clients. They may not be reproduced, distributed or published by you for any purpose except with Mirabaud Securities LLP’s express written permission. Mirabaud Securities LLP, an associated company, or their employees and officers may have a holding (long or short) in an investment which it knows will be the subject of a published research recommendation to clients. It may also have a consulting relationship with a company being reported on. Mirabaud Securities LLP or an associated company may also act as agent of its clients and may have or have undertaken transactions in investments covered by this document prior to your receipt of it. Additional information on the contents of this report is available on request. In the United States Mirabaud Securities LLP is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to major U.S. institutional investors ONLY in reliance on the exemption from registration provided by Rule 15a-6 of the US Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC"). MAJOR U.S. INSTITUTIONAL INVESTORS The Information being furnished is for distribution to “Major U.S. Institutional Investors” within the meaning of Rule 15a-6 of the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934.