Can Tesco's New CEO Turn This Latest Disaster Around?

Sep. 5.14 | About: Tesco PLC (TSCDF)


Tesco has lost 1.4 percent of its market base in 2014 to rival stores.

The former CEO was profligate in spending for restructuring.

The current CEO, Dave Lewis, has no experience with grocery stores.

Even though the current price for stock is at an all-time low, the dividend was slashed by 75 percent, spending has been cut back and store refurbishment has been delayed.

Barring a miracle, it is going to take years for Dave Lewis, Tesco's (OTCPK:TSCDF) new CEO, to turn the company around from its current freefall and get the grocery giant back in the red, if it can be done at all.

This isn't a condemnation of his abilities, even though Lewis has no grocery market experience and comes from Unilever, a multinational corporation that is a consumer product giant. It's just unlikely that anyone could turn this company's fortunes around quickly, even if they used a PPI claims calculator.

Tesco has long been the supermarket leader in the UK, but was losing market share prior to the departure of its long-standing CEO Terry Leahy in 2011. Phil Clarke took the reins and embarked on an ambitious recovery plan that cost more than £1 billion and ultimately failed. He issued the first profit warning in January and a second one in July. This has led to Mr. Clarke leaving Tesco and Dave Lewis being brought in early, immediately following the company issuing the third profit warning.

"Our new chief executive, Dave Lewis, will now be joining the business on Monday and will be reviewing every aspect of the group's operations. This will include consideration of all options that create value for customers and shareholders," said Richard Broadbent, chairman of Tesco's board of directors.

Dave Lewis is starting his leadership of the company a month early and to create more flexibility in the day-to-day operations of the supermarket has cut the dividend to 1.16p per share and slashed the company's capital spending plan by £400 million.

On his first day, Tesco shares lost a further 2 percent.

Mr. Lewis said: "You will know only too well that is has not been an easy time for our business. The retail market in all countries where we operate has become extremely tough, and is changing faster than ever. We are losing market share in our largest market and we need to address this with urgency. The most important thing is that we all focus on being on top of our game. We need to keep it simple and customer-focused."

This message, intended for the staff of Tesco, is indicative of the changes it has been facing. Lower priced supermarkets are challenging them from below, while higher priced specialty markets are taking market share from above. This leaves the grocery giant in the unenviable position of recapturing market share it just lost from supermarkets that have been operating aggressively for years.

Mr. Lewis continued: "Clearly we all want to see an improvement in performance, but I won't take any hasty decisions. The decisions I take will be based on what's best for customers, for shareholders, for colleagues, and hence the whole Tesco business. We have some urgent issues to deal with, but we must address these in a way which is consistent with building a long-term sustainable future."

Harris Associates, a US firm that is one of Tesco's biggest shareholders, cut its investment in the supermarket by two-thirds. This sale occurred on Mr. Lewis's first day. According to the Sunday Telegraph, the sale was because of "unclear management direction and incoherent strategy."

If you are looking for secure stocks, or a short-term turnover with profit, this isn't for you. There is also a good chance that stock prices will dip even lower once Mr. Lewis has reviewed the company operations and puts into action a plan to help the ailing giant. That plan will, of necessity, include further cuts to dividends as he will need capital to restructure and streamline the business. Even optimistic loyalists will start losing patience when a fourth profit warning is issued.

The price of the stock will go down before it rebounds. The chances of the business being forced into foreclosure or being bought out are slim at this point, but seeing this company make a profit anytime soon will depend on how deep and wide the cuts that Mr. Lewis has to make and how those cuts are reflected in the board of directors and other grocery store chains.

As a long term investment, waiting would also be indicated. If the price drops lower, you would be able to pick up more shares at a better price and even if it begins to rise, there will be a window of stability to buy shares in the store prior to it moving upwards.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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