Shares in #1 UK grocer Tesco have already given up 2% results-inspired gains as investors dig deeper into what is, on the surface, a solid set of results. Drastic Dave Lewis’ continued aggressive cost-cutting has helped deliver an impressive eight-fold increase in pre-tax profits and a consensus beat once exceptionals are stripped out. Great news when coupled with a more than halving of the pension deficit, net debt -25% and stronger cash flow. Even more so when you factor in reinstatement of a much missed dividend, even if only a token penny interim payment, following a 3yr absence.

A return of dividends has been long awaited as evidence of management faith in the turnaround and recovery. However, it does nothing to hide what is worryingly pedestrian UK Q2 growth of just 0.4% for transactions and 0.3% for volumes while like-for-like sales slow to 2.1% from what may now prove a brief 2.3% peak in Q1. Concerning when discounters like Aldi and Lidl continue to take market share monthly, openly competing on price (now 12.2% combined market share, +3.9pts since Jan 2015, vs Tesco’s 27.8%, -1.3pts since Jan 2015).

Lots of positives, granted, but work still to do. Remember that Tesco shares were +4.5% at one point after Q1 results (16 Jun), before closing almost 5% lower on fears of an economic downturn and tough market conditions. We’ve already spiked as low as -3.5% this morning and, despite flirting with a breakout at 190p, the level could well revert to resistance.

Mike van Dulken, Head of Research, 4 Oct 2017