Morning Mumble: Tesco (Duncan Fox)

Good Morning once again,

Tesco: Buy

These results show that Tesco is starting to recover, though it will be a long haul. The underlying numbers for the period are not exactly good at l-f-l -2.9%, but when you see that during Q2 these numbers were -5.4% you can see the improvement. Also, the results over Christmas were considerably better at -0.3% (six weeks), but for us the most positive aspect of these figures was the growth in fresh food volume for the first time in 5 years. This is staggering as we would assume that this would have been the key thing to focus on in a food retailer, but it shows how far Tesco had forgotten their roots.

We are also encouraged that Tesco will now focus on the 1000 best selling lines, clearly they will make sure that these are available at all times. We have stated many times that Food Manufacturers would accept lower prices for higher and consistent volumes as they can then produce the products far more efficiently, so we suspect that the producers of these brands (and Tesco actually) will make better margins here than anywhere else. Just have a look at today's newspaper (well the Metro anyway), big brands at cheap prices will pull the punter in.

Probably the most important news other than the actual results though is the appointment of Matt Davies as CEO of the UK and Irish business. He has an excellent reputation and will certainly offer comfort to investors as they have been worried that running the whole of Tesco would be too much for a none retailer. We were not too worried about this, but having someone as good as this to concentrate on the business will leave Dave Lewis to get the structure of the Group right. The fact that they haven't had a rights issue today suggests to us that all of the assets apart from the UK and Irish businesses are potentially up for sale. As Tesco doesn't have to pay back any debt for c.18 months, this allows the management time to get the right price for these assets and invest properly within the UK.

Other than the above we have also seen the management announce a cost savings programme that should save £250m at a one-off cost of £300m. Head offices will be sold (they have 29 of them!), and working practices changed to reflect a growing business (incentive based payments). All of this makes us happy to remain a buyer of the stock.

End

As always bold is mine. There's more news to come shortly from Tesco, which may assist with the debt structure and viability of the business. Whether the assets will be sold in their entirety is another question, save for Blinkbox & Broadband. 

Leggie, indeed cherry picking to a limited degree but what has changed in Tesco is a top to bottom approach. Namely how managers are reporting has changed including the openness and clarity to market (they cannot afford to get this wrong), something perhaps that will change the dynamics for the likes of Sainsbury's.

Many thanks Duncan whom we may have a little more to say about later! 

Atb Fraser