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Tesco shares rally 5 as it makes long overdue changes

Article By: ,  Financial Analyst
January 8, 2015 7:51 AM

Tesco today confirmed its Q3 trading numbers and highlighted a number of strategic changes designed to cut costs at the firm and realign its growth intent.

Here are the main highlights from the retailer:

 

The end of gluttony

Today’s announcement, which highlights how the firm will achieve £200m a year in cost cutting and look for strategic disposals of some of its assets, is entirely welcome.

To dispose of Blinkbox and Tesco Broadband to Talktalk, as well as explore strategic options for a likely disposal of some or all of DunnHumby is a good starter. The closure of 43 unprofitable stores and the confirmation that it plans to pull out of 49 UK store developments is also crucial.

I summarise this Tesco update as the end of gluttony. For far too long, Tesco has failed to adapt to the structural decline the sector now finds itself in. The moves announced today, which sees 43 unprofitable stores close, 49 planned store developments cancelled and the sale of Tesco Broadband and Blinkbox to Talktalk, helps to remove the fat around Tesco’s agility and performance.

Tesco’s CEO, Dave Lewis, is in streamline mode and this is going to sit very well with shareholders. As does the fact the firm has confirmed its full-year profit guidance after multiple profit warnings in the last six months. But the heart of their recent failure lies with its inability to challenge the populism of discount shopping. That’s why its now joining the supermarket price war in a more competitive way than ever before, which could have an even bigger knock on effect to the sector, given Tesco size. There is a lot to like in this update. But it would have been received even better had it come a year ago.

Tesco shares open +4.8%

In reaction to the update, Tesco shares rallied strongly, hitting a high of 194p and rallying more than 4%. See chart below as well as client trading sentiment.

 

 

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