Will bank sell-off boost Tesco’s share price?

While Tesco’s share price has staged a decent recovery from last October’s six-year low, investors will be hoping that a potential sale of its Tesco Bank business gives the FTSE 100 stock added impetus. Meanwhile, Tesco has boosted staff pay for a third time in 12 months, and announced it will cut 1,750 team manager jobs.

While Tesco’s [TSCO.L] share price has recovered from last October’s six-year low, investors will be hoping that the mooted $1.2bn sale of its Tesco Bank business gives the FTSE 100 stock added momentum in the longer term.

Tesco has responded to the cost of living crisis, as well as its competitors, by increasing employee pay in stores by up to 7%, marking the third salary increase inside a year. Additionally, in efforts to cut costs, the UK’s number one supermarket chain has said it will cut 1,750 team manager jobs, replacing these with 1,800 lower-paid shift leader positions.

The Tesco share price has bounced back since 13 October, rising by just over 27% to 246.90p at the close on Friday 24 February, after a profit warning had sent the shares to a six-year low of 194.35p. Year-to-date, Tesco shares are up 10.12%. However, despite the upturn since last autumn, the stock remains 15.92% below the 1 March 52-week high, at 293.64p.

Now, with a solid festive season behind it, can the Tesco share price push on towards the 300p level?

Bank sale boost?

The supermarket giant is to review its presence in the UK banking sector, reports Sky News, which could signal a major shift in strategy, with a potential sale of the Tesco Bank business.

Goldman Sachs is set to advise on the future of the Edinburgh-based bank, which was launched back in 1997. Aside from the full sell-off of its banking division, other possible options on the table include a partial sale, or even a joint venture agreement.

The bank, which has over five million customers, offers products including savings accounts, credit cards, and insurance, but not mortgages, a division which was bought by Lloyds Banking Group [LLOY] in a deal worth $4.5bn in 2019.

If Tesco Bank was to be sold outright, the deal could be worth in excess of £1bn, according to banking analysts. Tesco CEO Ken Murphy has, until now, been publicly supportive of the retailer’s presence in the banking sector, but a sale, whether full or partial, would enable the company to focus on its core offering, and could appeal to investors, potentially boosting Tesco’s share price in the longer term.

While a potential sale of Tesco’s bank unit remains a long way off, investors and analysts will be closely watching for the results of the Goldman Sachs review, which is likely to take several months.

Staff pay rise

Tesco revealed last week it will increase hourly pay for shop floor staff by 7% to a minimum of £11.02 an hour, the third pay rise within a year. London employees will receive a pay rise to £11.95 per hour.

Retailers have been forced to introduce multiple pay rises in the past 12 months amid heavy competition for workers and a surge in the cost of living.

National officer of shop workers’ union Usdaw, Daniel Adams, who negotiated the Tesco pay deal, said that it “represents a third increase in pay in 10 months and ensures that the business continues to respond positively to the significant pressures our members face.”

Manager jobs slashed

As well as boosting pay to retain staff, Tesco, like its peers, is seeking to make efficiencies to cut costs, in efforts to keep food prices down and retain customers amid the cost of living crisis. Moreover, the UK’s traditional big four supermarkets—Tesco, Sainsbury’s, Asda, and Morrisons—are facing up to the threat of competition from discounters Aldi and Lidl.

More than 2,000 roles are at risk after Tesco announced more changes to the way it runs its supermarkets, reported BBC News. Tesco said it was planning to cut 1,750 team manager posts across larger stores, while closing roles elsewhere. A new tier of 1,800 lower-paid shift leader positions will take over running its shop floors.

Tesco also announced the closure of its counters and hot delis, with staff offered alternative jobs, from 26 February. The supermarket also plans to cut jobs at its head office, and is closing its national operating centre in Milton Keynes.

Positive third quarter

Tesco’s third quarter update last month showed total group sales rising by 5.7% in the quarter to date, accelerating to 7.9% in the weeks leading up to Christmas. Tesco maintained its market share of 27.5%, despite increasing competition from Aldi and Lidl, while reconfirming its full-year guidance of adjusted operating profit of £2.4bn to £2.5bn.

Tesco’s share price responded by closing the day up 2.8%. 

The nine analysts offering 12-month price targets on Tesco shares with the Financial Times have a median target of 270.00p, with a high estimate at 310.00p and a low estimate of 235.00p. The median estimate suggests a potential upside of 9.36% versus 24 February’s close of 246.90p. Analysts’ current consensus outlook is also skewed to the upside, with two ‘buy’ and seven ‘outperform’ recommendations, along with six ‘hold’.