Should you stock up on shares in Tesco?

‘Drastic Dave’ leaves strong legacy at UK’s biggest grocer

The City was gushing over Dave Lewis this week, with some hailing his achievements at Tesco as the greatest retail comeback since Archie Norman – now chairman of M&S – saved Asda in the 1990s.

Lewis piloted the supermarket group through a £250m accounting scandal, and brought it back to profit after a £6.4bn annual loss – the worst result in British retail history.

But is he leaving the company with the job done, and what are its chances for growth in future?

On Wednesday he gave investors a tantalising view of the UK’s biggest grocery stock.

‘I have a feeling that the share price does not reflect the true worth of the business,’ he said.

The share price has remained stable this week, even with Wednesday’s solid set of half-year results – perhaps because the City remains in shock at Lewis’s departure.

his replacement is the relatively unknown former Boots executive, Ken Murphy. RETAIL analyst Nick Bubb said: ‘ Why did Tesco overlook an array of internal candidates and go outside and appoint Ken Murphy – aka, Ken who?’

Some have speculated that the choice of an external candidate reflects a shortage of talent inside the company, a suggestion Lewis rejects. Charlie Wilson, the most obvious replacement, has been seriously ill and other executives are relatively inexperienced. Lewis, however, did not have grocery experience when he joined from Unilever, and a long handover period will give Murphy plenty of time to settle in.

Alasdair McKinnon, fund manager at the Scottish Investment Trust, a Tesco shareholder, said: ‘Though relatively unknown, Murphy is an experienced UK retail and wholesale expert.’

Tesco shares are widely considered a buying opportunity by City analysts. Investors have watched as they have risen from 139p, just over a year after Lewis took over, to 237.2p (up 0.4pc, or 0.9p) yesterday, though admittedly they are not yet back at pre-disaster levels.

The question now is whether there is room to grow while discounters Aldi and Lidl nibble away at the UK giant’s market share year-by-year, and the online threat mounts.

Lewis said a return to strong profit margins, while maintaining relationships with suppliers, was at the heart of his strategy.

Improved margins have contributed to the strong profit growth of 6.7pc to £494m in the first half, putting the company on track to record £1.8bn of pre-tax profit this year and £2bn next year. On an underlying basis, Tesco brought in £1.41bn – 25pc more than in the same period last year.

Freddie Lait, chief investment officer of Latitude Investment Management, said this ‘powerful ability to generate cash was key’ for shareholders.

This week the interim payout was boosted from 1.67p to 2.65p. ESTIMATES suggest year- end return could rise from 5.77p last year, to 7.94p this year and up to a generous 9p per share the year after. That would hand £880m back to shareholders.

Some analysts are predicting share-price growth towards the 285p mark as well.

Tesco has highlighted the areas it is targeting for expansion including 750 express stores in Thailand and 150 in the UK, plus four large superstores.

Lewis told investors the group can build and run stores more cheaply, allowing them to bring in returns after just three years.

he also hopes the online food delivery business, which has already gobbled up more than a third of the market, will double in size in the coming years.

But Murphy will face significant challenges, including finding new ways to counter Aldi and Lidl, which have boosted their market share to more than 14pc, while Tesco’s continues to reduce.

And just two weeks ago Aldi announced a round of store openings taking them to 1,200 locations by 2025.

One major shareholder called Lewis ‘irresponsible’ for leaving before he has shown the £3.7bn takeover of cash-and-carry group Booker can generate long-term returns. Tesco’s UK sales growth is in the doldrums and there’s trouble in the Central european business where the dominant Polish arm is undergoing a restructuring, with a possible sale rumoured.

But most investors agree that Tesco is back as the dominant force in British grocery retail. It remains the biggest supermarket by far and profits are forecast to rise steadily to £2.4bn by 2021-22.

The Share Centre’s Graham Spooner said: ‘Investors appear not to be too concerned with the change at the top and are instead concentrating on the solid results.’

Assuming Lewis has hidden no unexploded bombs, he has left a good basis for growth – though in the current retail climate, no business can afford to be complacent.