Tesco cautiously optimistic after Christmas cheer

So far, so good for Tesco’s chief Philip Clarke. But the grocer is unlikely to boast profit margins of 6% or more any time soon

It was always odds-on that Philip Clarke would be able to engineer some form of sales recovery at Tesco. He gave himself a £1bn warchest to throw at the UK problem and was being compared with last year’s Christmas horror show. The question was whether he could perform the trick without lowering UK profit margins even further than the planned reduction from just over 6% to 5.2%.

He seems to have succeeded. Tesco says its outlook for the UK remains the same, which is a nod to the City to leave profit forecasts unchanged. Tesco’s Christmas, from the point of view of the consumer, might have felt like a blizzard of discount vouchers but, it seems, it was all in the budget.

So far, so good, then for Clarke. But remember, those profit forecasts for the UK envisage a 9% decline this year. The other question is the pace of recovery thereafter. On that score, six weeks’ sales data for Christmas are no guide whatsoever. All the big industry pressures – declining volumes, cannibalisation of sales from online switching and too many megastores – apply in droves to the market leader.

One suspects profit margins of 6% or more won’t be returning any time soon. It is back to the hard graft of trying to eke out gains in grocery market share, which Tesco hasn’t achieved for ages in the UK, despite adding a colossal amount of floor space (according to one estimate, over the past seven years Tesco has added the equivalent of Morrisons’ current UK business). On the non-food side, it is up against Amazon, which is no picnic either.

The good news for shareholders is that the end of “race for space” ought to mean a big improvement in cash generation. The City is salivating at the whiff of share buy-backs or a much-improved dividend. Aren’t investors owed a gift after the squandering of so much cash on the Fresh & Easy disaster in the US?

The latest corporate thinking of capital expenditure will be unveiled in April. It’s a hunch, but one suspects the notion of Tesco spraying its excess cash liberally on shareholders is overdone, or at least premature. It would look too much like declaring victory in the UK too early. Clarke seems the more cautious type. Tesco is off the canvas, but not yet throwing punches.

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