Tesco turnaround continues
Tesco (TSCO) 178.5p
Gain to date: 8.5%
Original entry point: Buy at 164.45p, 25 Aug 2016
Our bullish call on Tesco (TSCO) remains in the money and full year results (12 Apr) revealed good progress with the grocery giant’s recovery. Although pre-tax profit fell 39% to £145m after a £235m hit for overstating results in 2014, UK like-for-like sales grew 0.9%, the first reported full year growth for seven years.
Chief executive officer Dave Lewis says the recovery is ahead of expectations and Tesco is on track to achieve its 3.5%-to-4% operating margin target by 2019/20. Stronger cash generation and a drop in net debt from £5.1bn to £3.7bn means Tesco will also return to the dividend list in the 2017/18 financial year following a two year absence.
Same-store growth in the core UK business did decelerate in the fourth quarter and Lewis has yet to convince everyone of the merits of the £3.7bn takeover of Booker (BOK), a deal that would turn the supermarket titan into the number one player in the domestic cash and carry market too.
While the integration could prove a distraction for management, Booker is an audacious acquisition that will help Tesco keep costs and prices down for longer than rivals and gain greater exposure to the growing ‘out-of-home’ food market.
Competition from discounters remains fierce and the Booker deal brings complications, yet we’re staying on board with the turnaround. (JC)
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