Tesco beats expectations, as “Drastic Dave” announces his departure

CMC Markets

The Tesco share price has had an indifferent last few months, but has still managed to outperform the wider sector in what has been a difficult year for UK retail.

This morning’s first-half numbers were keenly anticipated in the context of how well the business has been doing, at a time when margins remain squeezed and competition in the sector remains intense.

Tesco CEO Dave Lewis to step down

The numbers haven’t disappointed, coming in better than expected, however they are likely to be overshadowed by the surprise announcement that CEO Dave Lewis is stepping down next year to be replaced by Ken Murphy, the CCO of  Walgreens Boots Alliance.

When Dave Lewis took over at Tesco the business was in real trouble, bedevilled by accounting scandals as well as the fallout from the horse meat scandal. He has turned the business around as well as reinforcing the company’s position as the UK’s number one food retailer and wholesaler.

He has also overseen the selling off of a range of non-core assets, as well as the acquisition of Booker in order to position the company as the go-to destination for trade buyers, as well as being one of the major suppliers to pubs, bars, restaurants and hotels.

More recently CEO Dave Lewis has overseen the disposal of the mortgage book to Lloyds Banking Group for £3.8bn, so this morning’s news that he is to step down as CEO is all the more surprising. In recent interviews he gave no indications that he was looking to engineer a departure from the management playing field.

Tesco share price up as results beat expectations

The overall numbers speak for themselves, with operating profits coming in at £1.41bn, well above expectations of £1.3bn, despite intense competition from the likes of Aldi and Lidl that has squeezed the supermarket sector from the bottom up.

Concern about this squeeze on margins has acted as a bit of a brake on Tesco's share price this year, with the shares trying and failing to overcome the 242p level on two occasions over the summer. However, Tesco's share price has recovered from early losses on the open this morning to move into the black, up 1.4% to 243p.

In the UK and Ireland, H1 revenues came in at £31.91bn, beating estimates of £31.79bn, as the company looks to enjoy a better H2, with the company optimistic that a good Christmas will allow it to hit its revenue target of just under £65bn.

It is certain that Mr Lewis will be missed, and he has cited personal reasons for his decision, saying that he believes that he has succeeded in delivering the turnaround plan he was employed to implement. He certainly leaves the business in a better condition than which he found it, however it is telling that his successor hasn’t come from within the existing management structure.

I wonder if investors will wonder the same thing as they digest today’s better-than-expected results, along with Mr Lewis’s surprise decision to leave.


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