After more than a year in the role, Tesco’s (LON;TSCO) chief executive Dave Lewis has yet to prove he is making a real difference at the supermarket chain.
Interim results are due tomorrow and after last year’s horror show, profits are again set to tumble but investors will be keener to see whether the momentum of a much talked-about “turnaround” is being maintained.
Earlier this year, the supermarket reported the sixth annual largest loss, £6.38bn in 2014, of any UK company in history, while its debt stood at an eye-watering £22bn. Underlying profits also fell by 68% to £961mln.
Underlying profits [EBITDA] are being tipped to halve again tomorrow to around £400mln.
Lewis’s response has been to scrap stores (and Tesco’s head office), but recently he started tackling bigger problems.
Last month, Tesco sold its loss-making South Korean business Homeplus to a group led by private equity group MBK Partners for US$6.4bn (£4.2bn).
The company looks set to rake in £3.35bn in net cash proceeds, with overall debt reduced by £4.26bn once regulatory approval is received, but Tesco is still in need of cash, and lots of it, because of its stretched balance sheet.
Dunnhumby, the data business behind the Clubcard loyalty scheme, could be next in line for the chop, but has had its sale price scaled back sharply to £700mln from a previously expected £2bn.
In the meantime, Tesco has been culling big brands from its shelves in order to reduce costs, with Carlsberg the latest to go.
Other brands no longer on the shelves include Kingsmill bread and soft drink brand Ribena, as the company focuses on its own line.
One option Lewis has continued to rule out, however, is a rights issue.
Likely, this would have to be at a big discount to the current share price, which, over the course of the year so far, has remained flat, giving Tesco some balance.
The chart from April is less healthy, with the shares down 25% or so, making tomorrow’s interims a key day for Tesco and Lewis.
Keith Bowman at Hargreaves Lansdown said investors will be looking for “news regarding other balance sheet strengthening disposals,” as it looks to keep up with its competition.
Last week, Sainsbury’s announced annual profits would top City forecasts, creating a flurry of excitement in the supermarket sector.
It won’t be easy for Tesco, however, with food deflation and a highly competitive pricing environment providing the backdrop.
Particularly disheartening, was the latest market review from Kantar Worldpanel, which shows the company’s market share dropped 0.6 percentage points year-on-year in the 12 weeks to mid-September.
Overall sales fell by 1% in the period, while others, including Sainsbury’s, saw sales grow.
Continued pressure from discounters Aldi and Lidl, which both saw sales rise more than 16% year-on-year over the period, has also hit Tesco.
And analysts aren’t convinced, at least in the short term, it will manage to keep pace.
Bowman, at Hargreaves, said declining profitability will be weighed against corrective action being taken by the still relatively new chief executive Dave Lewis.
“First quarter UK like-for-like sales declined by 1.3%, with second quarter sales likely to have retreated by a similar amount,” he added.
Meanwhile, Cantor Fitzgerald fears the results could be “very disappointing” for investors, adding that, in complete contrast to Sainsbury, it expects Tesco to issue more profit downgrades.
What, it says, is key for investors to watch for, is the strategy presented by “Drastic Dave” to rebuild cash generation and reduce debt by 2020.
The broker reckons this plan needs to be “very convincing” if Tesco is to avoid a rights issue and maintain the current share price.
With others proving their strategies are working, new Tesco boss Dave Lewis is under growing pressure to show the same.