Today I am explaining why Tesco (LSE: TSCO) could be considered a terrific turnaround stock.
Have till troubles turned the corner?
The assault on Britain’s established grocery giants by foreign chains Aldi and Lidl has been nothing short of devastating, and latest Kantar Worldpanel data showed the combined share of these outlets reach a record 8.6% during the 12 weeks to December 7, up from 7.1% in the corresponding 2013 period.
The pace of the discounters shows no signs of slowing, and for the likes of Tesco the progress of these businesses — boosted by their ambitious expansion plans — will prove a hard nut to crack.
Still, Kantar’s latest set of numbers will give investors optimism that Tesco’s may have put the worst of its travails at the tills firmly behind it. News of further sales declines are usually no cause for celebration, but the Cheshunt firm’s 2.7% decline in the past 12-week period was the best performance for six months and a vast improvement from the 3.7% drop punched in November.
The business has invested heavily in price cutting across the store to slow the charge of the budget chains and de-rail the recovery of mid-tier rivals J Sainsbury and Morrisons, a strategy that appears to be showing signs of paying off.
Tesco will of course have to show more invention to attract Britain’s shoppers back through its doors, not just because a programme of heavy discounting is simply not sustainable. But ahead of chief executive Dave Lewis’ strategy update next month, Kantar’s latest retail release will give sentiment a much-needed boost following months of scandal and profit downgrades.
Asian businesses provide exceptional growth potential
Since Tesco took the drastic decision to slash the dividend by a colossal 75% back in August, speculation over what the business will do to mend its broken balance sheet has reached fever pitch, and everything from a rights issue through to asset divestments has done the rounds since then.
Although the fate of Tesco’s emerging market businesses are in doubt as a consequence — a seemingly logical step given similar divestments in the US and Japan in recent years — I believe that the company’s revamped ventures in Asia may be saved from the chopping block.
Don’t get me wrong: enduring operational problems in Korea, Thailand and Malaysia may prompt Tesco to cut its losses in these particular places. But earlier this year the business affirmed its faith in China by integrating its 134 stores in the country with those of giant domestic giant Vanguard, and also built upon its wholesale, franchise and technical tie-ups with India’s Trent Hypermarket by securing a 50% stake in the firm.
I believe that Tesco knows better than to offload its interests in these key Asian growth markets, the likes of which should yield strong earnings growth in the coming years as consumer spending power gallops higher.