Cost cuts, asset sales in store for Tesco | Fin24
  • Credit Rating

    'I think Moody's will be happy' - President Ramaphosa says plan to deal with Eskom's debt is imminent.

  • 'No Basis in Fact'

    The PIC commission has slammed Iqbal Survé’s claims about Minister Pravin Gordhan.

  • Fin24’s newsletter

    Sign up to receive Fin24's top news in your inbox every morning.


Cost cuts, asset sales in store for Tesco

Jan 06 2015 12:47

London - New Tesco boss Dave Lewis is expected to focus on cost cuts and asset sales when he provides an update on his plans to revive the troubled British grocer's fortunes on Thursday.

Britain's biggest retailer, reeling from an accounting scandal and four profit warnings that halved its share price last year, could also detail substantial property asset write-offs to reflect the diminishing value of large out-of-town stores and development land, analysts have said.

Tesco will also report on third-quarter sales and the key Christmas trading period.

The accounting scandal led to the exit of several senior executives and sparked a series of investigations, including by Britain's Serious Fraud Office, and raised the spectre of possible investor lawsuits in Britain and the United States.

Lewis was parachuted in from Unilever in September and said last month that detail on measures to strengthen Tesco's balance sheet and improve its competitiveness would be forthcoming on January 8.

However, he has repeatedly stated that investors should not expect him to lay out a major strategic blueprint for the next three years or put a figure on how many hundreds of millions of pounds he will invest in price cuts to narrow the gap with German discounters Aldi and Lidl in an attempt to stem its loss of market share in Britain.

With Tesco's debt rated by Moody's at one notch above junk status and under review for further downgrade, the need to shore-up its balance sheet is pressing.

In October Tesco cut its interim dividend by 75% and investors expect little or no payout at the full-year stage.

Analysts expect cost cuts to be wrung from reducing Tesco's head office staff of about 4 000 and consolidating the firm's 32 UK offices. Tesco's different store formats could also work together to use their buying power more effectively.

Lewis's stated preference is to raise funds by reducing costs and selling assets rather than issuing equity, while investors have told Reuters that they would rather the group sold or floated assets before they would consider a rights issue.

Potential disposals

Lewis could signal that Tesco is exploring the possible sale of its data analytics business Dunnhumby, estimated by analysts to be worth £2bn to £3bn ($3.04bn - $4.56bn).

Other possible disposals include its Thai business. Valued by analysts at about £5bn, the operation has already drawn the interest of Charoen Pokphand, Thailand's largest agribusiness conglomerate.

Its South Korean business, with an estimated value of around £4bn, is another candidate, as is the possible sale of a stake in Tesco Bank.

Peripheral operations, such as video-streaming business Blinkbox, are expected to go but will not raise much cash. TalkTalk is in advanced talks to buy Blinkbox, according to a source familiar with the matter.

Cantor Fitzgerald analyst Mike Dennis reckons Tesco could signal £4bn of asset sales, a £2bn writedown on British land and existing supermarkets, head office closure savings of £250m and annual cost reductions of £500m.

Tesco declined to comment.

Lewis said in December that Tesco's third-quarter performance was slightly better than its showing in the first half of the year, when same-store sales fell 4.6%.

HSBC analyst David McCarthy expects Tesco's trading to show improving momentum. He forecasts like-for-like sales down 2.5% over the six-week Christmas trading period, with the grocer benefiting from extra staff in the stores and improved pricing.

However, joint house broker Deutsche Bank forecasts a 4.3% drop in like-for-like sales in the Christmas period.

With austerity-era shopping habits having become entrenched among British consumers, the discounters have stolen share from all of Britain's so called Big Four grocers and analysts don't expect any of them to exceed last year's Christmas performance on a same-store basis.

tesco  |  retail


Read Fin24’s Comments Policy publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Company Snapshot


Struggling power utility Eskom will take centre stage at this year's mini budget

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...

Voting Booth

What do you think about private healthcare in SA?

Previous results · Suggest a vote