Tesco chief excutive Dave Lewis sees ‘encouraging signs’ despite profits tumble

Mr Lewis took the reins in September last year in the midst of the biggest crisis in the supermaket’s history

“We have delivered an unprecedented level of change in our business over the last 12 months and it is working,” Mr Lewis said (Tesco PLC)

Tesco chief executive Dave Lewis has insisted he was making progress on the rescue of the UK’s biggest supermarket, despite profits bearing the scars of the fierce fight for shoppers.

Mr Lewis took the reins in September last year in the midst of the biggest crisis in the supermaket’s history as discounters Aldi and Lidl snapped at its heels and the Serious Fraud Office launched an inquiry into a £326m accounting scandal. In April, the grocer revealed a staggering £6.4bn loss – the biggest ever for a UK retailer, driven largely by property writedowns.

The latest figures revealed operating profits for the six months to 29 August sank 55 per cent to £354m. Sales at stores open more than a year fell 1 per cent in the last quarter, and Tesco is paying no dividend. Profits from the UK and Ireland – the main business accounting for three-quarters of its £23.9bn sales – tumbled 70 per cent to £166m.

Mr Lewis admitted that “it takes a long time to rebuild a brand”, but said there were “encouraging signs” from his early efforts to put more staff in stores and improve service, although the wider market remained “challenging”. The average Tesco shopping basket of £48 is more than £1.50 cheaper than a year ago, presenting a headwind to reclaiming sales growth.

But despite the lower price environment, the number of transactions in UK stores rose 1.5 per cent, with sales volumes up 1.4 per cent, in a sign that shoppers are returning to the stores.

“We have delivered an unprecedented level of change in our business over the last 12 months and it is working,” Mr Lewis said. He has also cut prices across hundreds of lines, shut Tesco’s final-salary pension scheme, and is moving its main headquarters from Cheshunt to Welwyn Garden City in a measure expected to save £250m. The shares rose 4.85p to 197p, although Tesco failed to strike the upbeat tone of rival Sainsbury’s last week, which predicted full-year profits “moderately” ahead of City hopes.

Mr Lewis also failed to put to bed concerns over the balance sheet after abandoning the sale of Clubcard data firm Dunnhumby and playing down the prospect of further sell-offs. He completed the £4.2bn sale of its South Korean Homeplus arm last month – cutting debt by a fifth to £17.6bn – and insists he can generate the cash from the existing business to service the debt pile.

But analysts said he may need to do more. Darren Shirley of Shore Capital said: “Tesco will need to raise capital, and potentially a considerable amount, in order to progress without looking over its ‘balance sheet shoulder’.”

Mr Lewis refused to comment on the SFO inquiry; Mike Dennis of Cantor Fitzgerald warned of an eventual fine of up to £350m and said there could be further costs “associated with shareholder legal action to recover losses”.

But other company-watchers took heart from Mr Lewis sticking to full-year profit targets of £950m. Bruno Monteyne at Bernstein said delivering the figure meant “margins will close to double” in the second half of the year.