Tesco’s (LSE: TSCO) recovery is really starting to take shape, and the speed at which Tesco is cutting costs is nothing short of astonishing.
Sliding costs
All 43 stores that Tesco announced it was closing at the end of January have been shut, bar one. Nearly 50 new store developments have also been scrapped.
What’s more, Tesco has already offloaded four of the five corporate jets that the company was in possession of last autumn. The last plane is in the process of being returned to its owners and most of the company’s aviation staff were laid off last year.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Next year the closure of Tesco’s headquarters in Cheshunt, Hertfordshire will be complete, and the company’s management will move entirely to the other one in Welwyn Garden City.
All in all, Tesco is aiming to shave 30% (or £250m per annum) from its cost base by making these cuts, and they should already be having an effect on the retailer’s profitability.
And as costs fall, Tesco’s sales figures are starting to show signs of life. According to data from research company Kantar Worldpanel, Tesco’s sales rose 0.3% in the 12 weeks to 29 March, following growth of 1.1% in the 12 weeks to 1 March, Tesco’s strongest sales performance in 18 months.
Not all good news
However, it’s not all good news. When Tesco reports its full-year results on 22 April, analysts believe that the company will make property write-downs of £3bn-£4bn. These non-cash charges will push the company into a multi-billion-pound loss for the year.
Then there’s Tesco’s pension plan to consider. While Tesco’s final salary scheme is now closed, it is believed that the group will have to pay £250m a year towards reducing the pension funds deficit, which could now be as high as £3.4bn.
Still, overall Tesco is moving in the right direction. Costs are falling, sales are recovering and management seems to be steering Tesco back towards growth.
But Tesco has a long way to go before it can claim to have recovered fully.
Valuation concerns
Tesco’s current valuation is also extremely concerning. For example, at present Tesco is trading at a forward P/E of around 25, a high earnings multiple more suited to a growth company than struggling, low-margin retailer. This valuation leaves plenty of room for disappointment if Tesco’s recovery starts to falter.
So, based Tesco’s high valuation, for the time being I would avoid the company — for me, there are more attractive investments out there.
