When Dave Lewis was parachuted in to oversee Tescos (LSE: TSCO) turnaround efforts in 2014, the experienced retail manager had a daunting task ahead of him.
Nearly two years on and you could be forgiven for thinking Tescos recovery is complete; that is if you base your viewofitshealth on Dave Lewiss compensation package.
Hefty compensation
Last year Mr Lewis was awarded 4.6m in compensation, including 96% of his maximum possible bonus after beating internal goals forsales and profit, and improving the supermarkets relationship with suppliers.
Granted, the company has come a long way since Lewis took over in 2014. During the past two years, Tesco has scrapped its dividend, closed 60 unprofitable stores, abandoned 49 store developments, cut its rent bill by buying back 70 leasehold stores and two distribution centres, and strengthened its balance sheet with the 4bn fromits South Korean business. Whats more, the company is on track to lower costs by merging two head offices and has rejigged its pension scheme to reduce liabilities.
These are all significant changes, but when it comes to the top and bottom lines, Tesco is still struggling.
Struggling where it counts
During Dave Lewiss first full year in charge of the retailer, Tesco reported its first quarter of like-for-like sales growth in three years and posted annual pre-tax profits of 164m. These figures look impressive when you compare this performance to the reported loss of 6.4bn for 2014, a year that was skewed by one-off items. But the numbers dont look so impressive when you consider the fact that Tesco reported a pre-tax profit of 2.3bn for 2014.
And there are concerns that Tescos figures could begin to deteriorate again this year.
About to get worse?
According to City broker JPMorgan Cazenove, Tescos figures for 2015 were flattered by the fact that the group paid no corporation tax for the year, and one-off items such as the sale of Blinkbox, Tescos lossmaking video service, and a reclassification of ATM income from the bank to the retail division. Moreover, despite Tescos drive to cut costs JPMorgan believes that the introduction of the UKs new living wage (along with other factors) will push Tescos operating costs higher by 200m per annum in the years ahead. Higher costs going forward could floor Tescos recovery especiallywhen its widely believed that supermarkets are about to embark on yet another price war.
So overall, while Dave Lewiss pay packet may indicate that Tescos recovery is in full swing, on the ground the company still has a long way to go before management can claim to have stabilised the business. Investors may also feel shortchanged as during Mr Lewiss first full year as CEO, shares in Tesco lost 28% of their value. Over the past 12 months, the shares have lost a quarter of their value.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
