Tesco’s (LSE: TSCO) turnaround is well under way and now Tesco’s new CEO, Dave Lewis, or ‘Drastic Dave’ as he has been known in the past, is making yet more changes to the company’s management structure to cut costs.
It’s believed that the group is preparing to shed up to 9,000 jobs, removing a layer of management in larger supermarkets. It is understood that 6,000 jobs will go from Tesco’s head offices and 43 stores that it is closing.
In addition, ‘Drastic Dave’ wants to remove an entire layer of management from Tesco shops. According to sources with knowledge of the plans, the managers affected work between the store manager and shop assistants.
And in many respects this is a prudent move by management. In the past, Tesco’s has been criticised for placing too much emphasis on management layers within the company, leaving employees on the shop floor short-staffed and struggling to keep up.
Removing this management layer should not only reduce costs but also improve the group’s customer service and efficiency. Those whose jobs are at risk will be offered alternative roles within the company.
Getting stuck in
This new round of job cuts is a message to Tesco’s shareholders. Indeed, the group’s new management has quickly shown that it is willing to do whatever it takes in order to return the UK’s largest retailer to growth. And there are signs that this aggressive strategy could be starting to work.
Dave Lewis has said he wants to cut head office costs by 30% and cut costs by around £250m per year as Tesco looks to fund price cuts and shore up its balance sheet. 43 store closures have already been announced and the corporate giant is closing one of two corporate headquarters in Cheshunt, Hertfordshire as part of the drive to cut costs.
Still, Tesco’s group trading profits in this financial year will not exceed £1.4bn, which is less than half of last year’s reported profit. However, this could be a low point for the company.
Returning to growth
The latest industry sales figures from market data research firm, Kantar showed that Tesco returned to growth for the first time in a year over the 12 weeks to 1 February. In particular, the group’s sales ticked higher by 0.3% over the period, reversing months of declines.
So, it seems as if the group’s strategy to slash costs is starting to draw customers back in. Tesco’s new management team has got off to a great start but it’s still early days.
What’s more, at current prices Tesco looks to be overvalued, consider the company’s turnaround is only just starting to take shape. Tesco currently trades at a forward P/E of 22.3 and earnings per share are expected to fall 63% this year. Growth of just 3% is forecast for 2016 and growth of 17% is expected for 2017.
On that basis, Tesco is trading at a 2017 P/E of 17.2, a high growth multiple more suited to a fast-growing tech company, rather than a struggling retailer.