Tesco shares shaky on CEO mystery

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By :  ,  Financial Analyst

CEO news leaves more questions than answers

Obviously, Tesco’s key report has been largely eclipsed by news that CEO Dave Lewis will step down next year, earlier than most investors were expecting. It’s interesting to note that Lewis said that he is not departing to take up another role elsewhere and appears to be  leaving of his own volition. That implies his decision might have been as much of a surprise to the board as externally, though Tesco has known about his wishes for ‘some time’.

Tesco’s choice of replacement is a senior executive at Walgreens Boots Alliance, the U.S. health care group that owns the retailer Boots. Ken Murphy was previously a joint chief operating officer of WAB’s UK & Ireland division before becoming Executive Vice President of Global Brands. Clearly suited by dint of experience and seniority, he is nevertheless a relative unknown among major investors. That adds to the sense that his appointment does not necessarily represent a smooth transition. Consequently, curiosity about Lewis’s departure has deepened.

The group stated that it had initially approached Charles Wilson, the former UK/Irish Republic head, who is currently CEO of its Booker wholesales subsidiary, but he didn’t wish to be considered. The apparent absence of an internal back-up candidate is, again, not a great look, particularly given Lewis’ 5-year stint in charge.

As for Lewis, he’s indicated that personal reasons were the motivation for stepping down, noting that he will consider next steps after taking a break. As such, none of the details around his departure are entirely satisfactory. In fact, whilst the stock had stabilized at the time of writing, it was clearly volatile at open, despite a solid set of half-year results.

Those results ought to have been a big deal, and in fact they were. Chiefly, the group hit its long-standing 3.5%-4% operating margin target earlier than scheduled. The margin goal was carefully calibrated to provide more than adequate leeway for growth and cash generation, keeping Tesco on track to maintain its competitive edge, market share and of course, a progressive cash return policy. As such, the 4.4% group operating margin—4.2% in the core UK/Irish Republic region—over 26 weeks to 24th August is excellent news. It should even supersede better than expected like-for-like sales and core profits.

  • UK/ ROI beat expectations in H1 with a 0.1% on-year rise compared to -0.5% expected
  • UK/ROI LFL sharply weaker with a 0.6% fall, reflecting extraordinary Q2 2018 aided by World Cup, royal wedding, weather, etc. Some forecasts has expected a decline of as much as 1.8% though
  • Adjusted operating profits were £1.41bn vs. £1.30bn average forecast, according to Bloomberg

Relatively robust volume growth in the first half (+0.4%) driven by UK fresh food, and £31.91bn revenue comfortably above the average £31.79bn estimate underlines that Tesco continues to balance a defensive stance whilst pushing for growth. Avenues for geared-up cash generation remain too, with Booker synergies ahead of plan. That suggests the stock can maintain its regained lead against rival UK supermarkets. Now though, that also depends on how well Tesco and its incoming CEO can convince investors that the apple cart will only be upset momentarily, as Brexit looms.

Tesco chart

Recent outperformance of the sector looks to have hit a roadblock that coincides with the negative fundamental surprise. The falling trend that stems from TSCO’s 266.9p cycle high in August last year has capped the shares for a second time as resistance. It was initially validated by a reversal at 2019’s high of 254p in April. Any doubts that the shares are experiencing a downturn ought to have been dispelled by the collapse of a short-term hyper-bullish wedge soon after TSCO failed at declining trend resistance. The most important thing for buyers now is how far the correction may run. Well, many trimmings continue to back the case for gains, including short- and long-term averages like the 200-day MA and 21-day exponential MA that still point higher. As well, a bullish line that was established around the time of the 2016 Brexit vote remains intact. A major ‘stress test’ of that trend in late-2019/early-2019 ought to reinforce perceptions of its strength. 211p, aggressively bought in January and late-August, should also be considered as defence, well before the bottom of this year’s trend at 187p might be required. Confirmed support from the 200-day MA would be an early corroboration that the bias remains with buyers. The obverse would apply if the threshold breaks.

Tesco Plc. CFD – Daily

Source: City Index

Related tags: Brexit UK

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