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Tesco - 'a year of progress' but another leg to come

By Chris Bailey | Wednesday 11 April 2018

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Well I called it. Back in January I told you that opportunity was better than the threats to the Tesco (TSCO) business model and I urged you to buy the stock, which is now trading at the 220p+ level I hoped for in my write-up.

Tesco's has been a corporate rollercoaster over recent years but three years into 'Tesco Dave's' turnaround he has come good and the stock price at its highest level since a couple of years ago is his reward. Certainly you are still going to be hacked off if you have owned the shares for a few years but the investment world is all about how you react and the last year or so has been all about adding/building a position in Tesco and not believing the groupthink that food retailers are stuffed. It is true that the Aldi's and Lidl's of this world do have some appeal...but so does the range, online capabilities, economies of scale, locations, working better with suppliers and related of the biggest food retailer juggernauts. That's why Tesco is gaining market share and rebuilding loyalty.

So where do we go from here? It was actually a funny investor conference and update by the company. It made all the right noises on cost savings, a little bit of inflation here and there, good cash generation which has pushed down debt again, some surprisingly good performance by its largest stores and a 3p dividend which is certainly better than nothing. The shift of UK/Ireland from losses to profit in the last three years is central to these shifts unsurprisingly and when you look at the reasons why cost control and a bit of price inflation are both key.

As it should be for a food retailer, the core food business has been the greatest source of upward movement and in one interesting chart from the presentation deck this actually contrasted with the other big sector players. Why? Well part of the Tesco malaise issues was simply getting away from the core competency of being a store that could stretch/appeal to every food shopper. Anyone remember those diworsifications of Tesco Funerals or the Hudl smartphone? Ugh. Talk and focus in the numbers today about own brands is quite right. No surprises this segment is growing faster than the overall business. Some revisions to Clubcard - including contactless capabilities – have been helpful too.

But - as the management noted a number of times - 'it is the last time we will present Tesco results in the current form'. Why? Because the newly cleared Booker deal will start to be incorporated in future numbers. As I have discussed before I think blending the wholesale Booker operations into Tesco's is a smart step. It opens up some other markets for Tesco products and the well-respected Booker CEO joins the company as effectively CEO-designate when 'Tesco Dave' decides his future lays elsewhere. The deal is only five weeks in but you can tell they are genuinely excited about it. I would imagine they are probably amazed it got cleared by the authorities.

So what next? Well all the medium-term targets remain and if the progress showed in today's numbers continues that justifies today's share price. The key is going to be what it really thinks Booker might add and the 'Joining Forces' initiative in due course will show this up. I think it has only shown some of its hand here and the observation in the analyst presentation of 'being motivated about what is coming next'. In short take some short-term profits if you wish but don't be too quick in selling out of Tesco yet. There is another leg still to come. The next big technical test is the 240p level from earlyish 2015.

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