It looks as ifTescos(LSE: TSCO) efforts to take on the discounters are finally starting to bear fruit.
According to data from research company Kantar Worldpanel, Tescossales rose 0.3% in the 12 weeks to 29 March, following growth of 1.1% in the 12 weeks to March 1, Tescos strongest sales performance in 18 months.
These figures indicate that Tescos recovery is slowly gaining traction as the companys new management team gets to work, slashing costs and restructuring the business.
Unfortunately, Morrisons(LSE: MRW) andSainsburys(LSE: SBRY) are still struggling. Over the three-month period to 29 March, Sainsburys sales ticked higher by 0.2%, the retailers first growth since August 2014, while Morrisons sales continued to fall, declining 0.7% during the three-month period.
Turnaround in progress
So, it looks as if Tescos turnaround is starting to gain traction but the company still has a long way to go.
When the group reports2014-15 results on April 22 it is expected to post yet another fall in annual profit, marking the third year of falling income at the retailer.However, the groups profit should return to growth this year as cost cutting measures start to take effect.
Tesco is in the process of closing itshead office in Cheshunt, north of London, and shutting itsexisting pension scheme, which should shave around 250m a year off the companys cost base.
In addition, the retailer is slashing annual capital spending to 1bn, down from 5bn, closing 43 unprofitable stores and scrapping49 planned store developments. These actions, coupled with rising sales, should enable Tescos bottom line to start expanding again.
Still, while Tescossales are starting to stabilise, the companys turnaround is far from complete. The retailerhas a long way to go before it can claim to have returned to growth.
However, the retailers premium valuation indicates that the market has already priced in a recovery, which doesnt leave much room for error if Tescos recover falters.
For example, at present Tesco is trading at a forward P/E of 23.3, compared to Morrisons and Sainsburys, which aretrading at forward P/Es of 16.6 and10.2respectively. Im not sure Tesco deserves to trade at such a wide premium to its peers.
And after slashing its dividend payout last year, Tescos dividend yield is the lowest of the trio. The companys shares are set to support a dividend yield of 0.5% this year. Morrisons and Sainsburys are set to yield 3.2% and 4.9% respectively.
The bottom line
Overall, Tescos turnaround is starting to take shape but the company still has a long way to go.
Unfortunately,now the company has slashed its dividend payout, income investors have been left high and dry.
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