Tescos(LSE: TSCO) turnaround is well under way and now Tescos new CEO, Dave Lewis, or Drastic Dave as he has been known in the past, is making yet more changes to the companys management structure to cut costs.
Its believed that the group is preparing to shed up to 9,000 jobs, removing a layer of management in larger supermarkets. It is understood that6,000 jobs will go from Tescos head offices and 43 stores that it is closing.
In addition, Drastic Davewants to remove an entire layer of management from Tesco shops. According to sources with knowledge of the plans, the managers affected work between the store manager and shop assistants.
And in many respects this is a prudent move by management. In the past, Tescos has been criticised for placing too much emphasis on management layers within the company, leaving employees on the shop floor short-staffed and struggling to keep up.
Removing this management layer should not only reduce costs but also improve the groups customer service and efficiency. Those whose jobs are at risk willbe offered alternative roles within the company.
Getting stuck in
This new round of job cuts is a message to Tescos shareholders. Indeed, the groups new management has quickly shown that it is willing to do whatever it takes in order to return the UKs largest retailer to growth. And there are signs that this aggressive strategy could be starting to work.
Dave Lewishas said he wants to cut head office costs by 30% and cut costs by around250m per year as Tesco looks to fund price cuts and shore up its balance sheet. 43 store closures have already been announced and the corporate giant is closing one of two corporate headquarters in Cheshunt, Hertfordshire as part of the drive to cut costs.
Still, Tescosgroup trading profits in this financial year will not exceed 1.4bn, which is less than half of last years reported profit. However, this could be a low point for the company.
Returning to growth
The latest industry sales figures from market data research firm, Kantar showed that Tesco returned to growth for the first time in a year over the12 weeks to 1 February. In particular, the groups sales ticked higher by 0.3% over the period, reversing months of declines.
So, it seems as if the groups strategy to slash costs is starting to draw customers back in. Tescos new management team has got off to a great start but its still early days.
Whats more, at current prices Tesco looks to be overvalued, consider the companys turnaround is only just starting to take shape. Tesco currently trades at a forward P/E of 22.3and earnings per share are expected to fall 63% this year. Growth of just 3% is forecast for 2016 and growth of 17% is expected for 2017.
On that basis, Tesco is trading at a 2017 P/E of 17.2, a high growth multiple more suited to a fast-growing tech company, rather than a struggling retailer.
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