Cost cuts, asset sales and writedowns in store for Tesco

New Tesco boss Dave Lewis is expected to focus on cost cuts and asset sales when he provides an update on his plans to revive the troubled British grocer's fortunes on Thursday.

Britain’s biggest retailer, reeling from an accounting scandal and four profit warnings that halved its share price last year, could also detail substantial property asset write- offs to reflect the diminishing value of large out-of-town stores and development land, analysts have said.

Tesco will also report on third-quarter sales and the key Christmas trading period.

The accounting scandal led to the exit of several senior executives and sparked a series of investigations, including by Britain’s serious fraud office, and raised the spectre of possible investor lawsuits in Britain and the US.

Measures

Mr Lewis was parachuted in from Unilever in September and said last month that detail on measures to strengthen Tesco’s balance sheet and improve its competitiveness would be forthcoming on January 8th. However, he has repeatedly said investors should not expect him to lay out a major strategic blueprint for the next three years or put a figure on how many hundreds of millions of pounds he will invest in price cuts to narrow the gap with German discounters Aldi and Lidl in an attempt to stem its loss of market share in Britain.

With Tesco’s debt rated by Moody’s at one notch above junk status and under review for further downgrade, the need to shore-up its balance sheet is pressing.

In October Tesco cut its interim dividend by 75 per cent and investors expect little or no payout at the full-year stage.

Analysts expect cuts to be wrung from reducing Tesco’s head office staff of about 4,000 and consolidating the firm’s 32 UK offices. Tesco’s different store formats could also work together to use their buying power more effectively.

Preference

Mr Lewis’s stated preference is to raise funds by reducing costs and selling assets rather than issuing equity, while investors have told Reuters they would rather the group sold or floated assets before they would consider a rights issue.

Mr Lewis could signal that Tesco is exploring the possible sale of its data analytics business Dunnhumby, estimated by analysts to be worth £2 billion-£3 billion (€2.55 billion-€3.88 billion).

Other possible disposals include its Thai business, valued by analysts at about £5 billion and its South Korean business, with an estimated value of £4 billion, as well as the possible sale of a stake in Tesco Bank.

Cantor Fitzgerald analyst Mike Dennis says Tesco could signal £4 billion of asset sales, a £2 billion writedown on land and existing supermarkets, head office closure savings of £250 million and annual cost cuts of £500 million. Tesco declined to comment. – (Reuters)