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Shore Capital upgrades Tesco on management change

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Shore Capital has upgraded Tesco shares to a ‘hold’ from a ‘sell’ following the appointment of new CEO Dave Lewis from Unilever.

Clive Black commented: “Tesco has made a surprise announcement this morning with the appointment of the highly regarded Unilever executive, Dave Lewis, as the new CEO of the group. Mr Lewis will replace the incumbent Philip Clarke on the 1st October 2014; Mr. Clarke will be available to support Mr. Lewis until the end of January 2015. We welcome this appointment as Mr. Lewis is a first class executive who has been a great success at Unilever where is he currently Global President of Personal Care; we see Mr. Lewis’ departure as a loss for Unilever.

“Mr. Lewis joins Tesco at a difficult time. Hidden in today’s announcement is another trading warning with the group stating; ‘sale and trading profit in the first half of the year are somewhat below expectations’. Such an outcome does not come as a surprise to us as recent trading in the UK has been rock bottom; an outcome reflecting a particularly weak and competitive UK grocery market.

“However, it also has to be said that Tesco’s trading strategy has, to our minds, contributed to the woes of the company and the pain of a weak share price faced by shareholders. We have argued for some time that Tesco has not had a pricing file that is competitive enough in its home market, recognising that the group has been engaged in some good work on store updates and category reviews. As such it has seen a material reduction in sales densities, which is the prime factor behind today’s effective warning.

“We await Mr. Lewis’ prognosis for the business, particularly the UK, with considerable interest. We believe that his appointment will be greeted with a great sense of encouragement by a store staff that has been pummelled in recent years. A material change in UK trading strategy cannot be dismissed, which is likely to have considerable implications for the rest of the sector. As such today’s news leads us to reiterate our sell stance on Morrison (Sell at 178p) and Ocado (Sell at 401p) shares and while we keep our Hold stance on Sainsbury’s (Hold at 325p), we harbour one or two more worry lines given scope for greater industry gross margin pressure.

“In addition to strategic change, we also expect to see adjustments to Tesco’s executive team in time and maybe considerable reconfiguration of the group and executive Boards, noting as we do considerable market criticism of senior management in recent times.

“Following this update we will be adjusting our Tesco financial expectations down once again, we will confirm figures once we have spoken to the company, noting as we do that the group is also in the process of welcoming a new CFO in the form of Alan Stewart from Marks & Spencer (Hold at 436p). Clearly the interim performance is going to be especially weak, which will kick into the full year out-turn and, with a lower base, FY2016 too.

“With this important development we sense that the market will welcome the change, which is a melancholy point to make given the hard and extended graft that Philip Clarke has put into the group. However, there has been a feeling of inevitability about developments at Tesco in recent times, and as such with this news we would expect the market to offset the disappointment of the downgrades with a sense of relief that the group is entering a potentially more effective chapter in its development. Hence, in expectation that the bull will be grabbed by the horns, we upgrade our recommendation on Tesco from sell to HOLD and for the sake of the group’s shareholders wish Mr. Lewis well.”


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