Tesco could be the perfect medium-term turnaround play

Tesco store © Getty Images
Tesco: getting a shakeup

This week’s news that Tesco is dumping CEO Philip Clarke – just days before he was to celebrate his 40th anniversary at the group – leaves me with mixed emotions.

I’ve been so drawn to the management’s recent plan to revitalise the business by increasing the number of local stores, and even taking on Amazon, that I’ve turned buyer on Tesco stock during its recent lacklustre period.

My argument has been simple: with the stock price so deflated, and every chance of a turnaround over the medium term, let’s buy cheaply and wait patiently for good times.

In short, I’m betting on Tesco turning it around. I think this is the perfect stock to stick away for five or ten years and come back to, and today I’m going to show you why.

This turnaround is happening with or without Clarke

First of all, although Philip Clarke is at the helm, it’s worth remembering that he’s just one member of the team. When he leaves, he leaves a decent team behind him.

For instance, the multi-channel retail project is headed by former Amazon UK boss, Robin Terrell – a poacher turned gamekeeper, you might say.

And nowadays there’s far more to Tesco than just retailing – I recently wrote about the company’s timely move into the banking industry.

Even more recently, Tesco announced its plan to become a major housebuilder. Having made a U-turn on its superstore growth plans, it’s now ready to build 4,000 new homes on the land instead. And it’s got an in-house construction company to do it.

The truth is this: with or without Clarke, Tesco’s turnaround plan is in effect. The City just wanted a head on a platter, and got one.

And look what happened. Despite the profits warning that came with the news that Clarke was stepping down, Tesco shares rallied 3%.

That may have something to do with the firm’s new appointment – a new face that maybe, just maybe, brings Tesco’s turnaround a little closer.

The first outsider to run Tesco, ever – and he’s a Harvard man

If you remember, back in 2007 the Tesco behemoth was taking one pound out of every seven spent in the UK.

Sounds great, but so what? To become a great stock, we want to see profits. We’re talking margins, here – and the fact is, supermarket retail margins are pretty poor.

Tesco is now focusing on higher margin non-food areas, but that’s not to say it can ignore the core food business.

Which is handy, because that’s what the new CEO Dave Lewis is all about.

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Lewis studied at Harvard and is a former Unilever man. He’s the first outsider to take the helm at Tesco – ever. While at Unilever, he ran the UK and Ireland business, in charge of brands from Pot Noodle to Cornetto ice creams. He went on to run Unilever’s massive global toiletries division.

His mantra seems to be: margin, margin, and margin. Food retailing magazine The Grocer named him ‘Drastic Dave’ – due to his propensity to slash jobs and turnaround poorly performing business units.

We’re told that he’s worked closely with Tesco over the years as a major supplier, so I’d guess he’s already got a few ideas about where he needs to wield the knife.

And he’s not the first big outside name to come to the British high street, either.

Drastic Dave isn’t the first to do this

During the early 2000s the high street was in a mess. Philip Green had taken the clothing industry by storm, his focus on improving margins.

Marks & Spencer wasn’t in the game. In fact, it was fighting a takeover by Green himself.

So what did M&S do? It turned to an outsider: Green’s former colleague, Stuart Rose.

Rose gave it the Green treatment, and over the years the shares recovered from under £2 to over £7.

I suspect, just like Rose for M&S, Dave Lewis is coming along to Tesco at a good time too. He’s not only a marketing whizz, but well versed in the industry from the suppliers side. I expect him to embrace Tesco’s already well-defined turnaround plans, and starting work on margin improvement at the same time.

The City wants to see change. And now! So… are they going to get it?

Make no mistake – Tesco is getting a shakeup

Lewis will no doubt go on the offensive.

I suspect suppliers will feel the heat, as will poorly performing areas of the Tesco operation. As an outsider, he’ll be less concerned about treading on toes.

More interestingly, we might also expect Tesco’s brand to receive a much needed new lease of life.

Bad news has been Tesco’s hallmark for years now. And if I’m brutally honest, I suspect there will be more to come.

But the thing is, it’s getting difficult to trash the share price any further now. With the stock backed by a twice-covered 5% yield, it gives us time to wait for a turnaround. Yes, this year’s figures are going to be worse than previously expected, and yes, Tesco will need to invest in change. So what if the yield falls off? So what if it hits 4%? This is still a reasonable income as we wait for better things.

Here’s my verdict: Tesco is one to tuck away in the portfolio or pension fund and forget about. When you come to look at the stock in five or ten years’ time, it could be quite a different beast.

For all his faults, I think the outgoing Philip Clarke understood the changing environment of supermarkets. I like his turnaround strategy, and his turnaround team – even if he’s gone.

Here’s hoping David Lewis is the right outsider, at the right time to accelerate the turnaround plan.

Let’s keep an eye on this story and see how it pans out.

This article is taken from our FREE daily investment email The Right Side.
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2 Responses

  1. 23/07/2014, Northfolker wrote

    The logic of the article is fine – Tesco is potentially a good turnaround situation. But the timing of this recommendation makes no sense to me.

    The shares can go lower and they probably will – when drastic Dave starts kitchen sinking the results and perhaps halving the dividend. I’d rather sell than buy at the current price.

  2. 23/07/2014, Realist wrote

    I don’t understand why it should be a good turnaround. You have the likes of Aldi and Lidl in the mix now, together with all the other supermarkets, so there will be no turnaround there, which means they will have to branch out elsewhere.

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