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Tesco turnaround on track
Tesco (TSCO) 178.7p
Gain to date: 9%
Original entry point: Buy at 164.45p, 25 August 2016
Supermarket Tesco (TSCO) will soon drop out of our Great Ideas portfolio after the requisite 12 months. Performance has been up and down with shares hitting highs above 200p last autumn and trading as low as 166.5p in early July. We consider this turnaround tale to be one worth sticking with.
Full year results (12 Apr) revealed good progress with the recovery at the nation’s biggest supermarket, UK like-for-like sales growing 0.9%, the first reported full year growth for seven years.
CEO Dave Lewis says 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 means Tesco will also return to the dividend list in the 2017/18 financial year following a two year absence.
A strong subsequent first quarter update (16 Jun) revealed a forecast-busting 2.3% hike in UK like-for-like sales and the latest Kantar Worldpanel grocery share figures (25 Jul) were positive for Tesco too.
While the squeeze on consumer spending and cut-throat competition are risks to weigh, the planned £3.7bn takeover of Booker (BOK) will turn Tesco into the number one player in the domestic cash and carry market.
This should help keep costs and prices down for longer than rivals and bring greater exposure to the growing ‘out-of-home’ food market.