Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) shares rose by 5% when markets opened this morning, despite the supermarket confirming that it won’t pay a final dividend for 2013/14.
The news came as the supermarket’s new chief executive, Dave Lewis, unveiled his turnaround plans for the business, alongside the firm’s traditional post-Christmas trading update.
Was it a Merry Christmas?
Tesco’s sales figures for the last 19 weeks suggest the firm is stemming the tide of defectors to Aldi and Lidl.
Like-for-like sales fell by 2.9% during the period, compared to a fall of 5.4% during the second quarter of the firm’s financial year.
Better still, like-for-like sales fell by just 0.3% over the six-week Christmas period, and the company reported positive like-for-like growth in fresh food for the first time in five years.
To help maintain this sales momentum, Tesco unveiled price cuts of up to 25% on hundreds of popular branded goods this morning.
Turnaround plan revealed
Tesco has poached Matt Davies, the highly regarded chief executive of Halfords Group, to lead its UK turnaround.
One of the first changes will be the closure of 43 loss-making stores, along with the cancellation of 49 planned large store developments. Tesco is also shutting its Cheshunt head office and relocating these functions to its existing Welwyn Garden City offices.
Planned capital expenditure for 2015/16 will be reduced by £1bn, and Tesco says that a combination of central office and store management restructuring will result in annual savings of £250m.
The firm will also close its final salary pension scheme, which has a £3bn deficit, and increase working-hour flexibility for store staff.
What about asset sales?
Tesco has sold its broadband operation and Blinkbox video-streaming business to TalkTalk and appointed Goldman Sachs to look into the options for its dunnhumby data business, which runs the Clubcard scheme.
There was no news on plans for Tesco’s Europe and Asia businesses.
Time to buy?
Tesco has confirmed its guidance for a trading profit of no more than £1.4bn for the current financial year, which ends on 22 February.
I’m encouraged by today’s news, which suggests that Mr Lewis has an open mind and is willing act decisively.
However, there was no news on expected property write-downs in today’s update, and Tesco’s balance sheet remains stretched: I wouldn’t be surprised if more cuts become necessary.
I continue to rate Tesco as a long-term recovery buy, but patience will be required.