26 June 2015

Tesco (TSCO) is top of the UK 100 this week, dragging fellow grocers Sainsbury (SBRY) and WM Morrison (MRW) up with it, thanks to today’s well-received Q1 trading statement. The update has revived interest in the shares, suggesting the new CEO’s turnaround and restructuring plan (sales, size and reputation) is beginning to pay off. Could a long-awaited recovery in sales growth, albeit early days, be on the cards? While sales fell by 1.3% in the first quarter, this was less than a pessimistic consensus had pencilled in (-1.6% to -3.0%). While enough to satisfy traders, the fact that sales contraction has improved from -1.7% in Q4 is exciting investors further, allowing them to focus on an improving 6-month trend.

Dave Lewis’ tenure as CEO has seen a tough start to say the least, with accounting irregularities, property write-downs, lost market share and a painful profits warning. He is quick to point out ‘still challenging markets’ and ‘short-term volatility’ but feels the Q1 results represent ‘another step in the right direction’. While a fierce sector price war continues, higher sales volumes in Q1 (+1.4%) imply internal issues being resolved and TSCO’s own price cuts proving fruitful, a combination which could help the UK’s leading grocer begin to claw back some of the market share it has lost to successful discounters. Will the break back above major moving averages (210-220p) seal the reversal of a 3-month downtrend? Could a better bid (£4bn+) for its South Korean unit Homeplus deliver the funds necessary to help offset last year’s unprecedented £6.4bn net loss and refocus on the key UK market? Could this all usher the shares back to 300p? It’s over to you Dave.

Mike van Dulken, Head of Research