So miracles can happen. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) suffered an annus horribilis in 2014, but this year its a different matter, with the share price up nearly 30% so far.
I can see several reasons for thismirabilis start to 2015my question is whether it is sustainable.
Tesco Turns
Markets had becomeso negative towards Tesco, still the UKs biggest retailer, that an upswing in sentiment was almost inevitable.
All weneeded was a bit of positive news, and the supermarketgot that earlier this month, when Kantar WorldPanel reported Tescos first rise in sales in a year.
It was only a 0.3% pick-upin the 12 weeks to 1 February, but a rise nonetheless. Itmeant an additional 236,000 customers through the doors.
German Miracle Slows
I saidlast year that Aldi and Lidl couldnt keep grabbing market share at afrenetic pace forever, and now were seeing signs of a slowdown.
Aldis sales still rose 21% during the 12 weeks, but thats down from 36% last April. Lidl is following a similar pattern.
Shoppers dont want to buy everything at the German discounters, and couldnt anyway, given their relatively limited ranges.
This means Aldi and Lidl will either have to accept a limited role in the market, or upscale to Tesco-like levels of choice, which would mean a different (and more costly) model.
Dave Gets Drastic
Another major reason for the Tesco turnaround is that markets have been impressed by no-nonsense new boss Dave Lewis. Inheriting such a shambles has worked in his favour, by giving him the freedom to take drastic steps such as shutting stores, closing the Tesco HQ, junking its private jets, culling 10,000 jobs, and terminating the final salary pension scheme.
Its brutal, but investors like that kind of stuff.
Thinking Outside BlinkBox
Lewis has also offloaded BlinkBox, predecessor Philip Clarkes ill-fated attempt to widen the Tesco model by breaking into online streaming, whereTesco squandered 40 million. I prefer businesses to do what theyre good at, rather than dabble in markets they dontget.
He is also partly reversing the dash for convenience stores, which have proved popular, but also cannibalised superstore sales.
Wages Of Thin
Tesco should get another boost as shoppers feel slightly richer, with the Ernst & Young ITEM Club forecasting the first real terms wage growth this year since 2007. It isnt predicting a wages boom, so dont get too excited.
Investors have good reasons to smile on Dave Lewis, but it could all fizzle out faster than you can say dead cat bounce. Dumping stuff that doesnt work is the easy part. Sacking thousands always raises a cheer in the City.Lewis needs to show that he can also work his magic in a positive way, by adding some polish to the Tesco brand.
He has turned around the collapsing share price. Now he needs to turn around customer perceptions as well.
One cut investors didn’t welcome was the 75% cut in Tesco’s dividend. But if you’re looking for a high-income stock, the FTSE 100 is still packed with companies yielding 5% or 6% a year.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.