I first started buyingTescos(LSE: TSCO) shares back in 2012, when the first signs that the retailer was struggling emerged. My thesis at the time was that Tesco, as the UKs largest retailer, had the size, market share and diversification needed to out manoeuvre peers.
However, when it became apparent that the UK retail market was undergoing an enormous structural change, I stopped buying and started waiting for Tescos management to put forward a coherentstrategy to take on the discounters.
Unfortunately, over the past three years Tescos situation has gone from bad to worse.
Luckily, my Tesco holding is only a small part of my portfolio and Ive been waiting for signs of a recovery to emerge before averaging down.
Green shoots
Over the past few months, figures have started to suggest that Tescos recovery is under way.
Indeed, Tescos first-half report was full of positive figures. For example, the volume of goods sold at Tescos stores rose 1.4% during the period, and the number of transactions rose 1.5% as Tesco started to win back customers. Further,in the six months toAugust 29, Tesco generated free cash flow of 281m, compared with a 134m outflow in the year-earlier period. Many City analysts werent expecting Tesco to generate any cash at all.
Sales at the companys European operations also showed improvement and Tesco Bank continued to be an invaluable source of income for the group.
Charting a course
Tescos troubles are similar to those faced by larger peerCarrefourseveral years ago, and by using Carrefour as a case study, its possible to try and predict how long it will take Tesco to stage a full recovery.
Carrefour, the worlds second largest retailer in terms of sales, ran into trouble back during the financial crisis. The European debt crisis sent the retailer over the edge and during 2011 the companys share price was cut in half. Sales collapsed across Europe and the company was forced to take drastic action.
Just like Tesco, Carrefours first move was to give its CEO the boot. The new CEO found a company that had become complacent, over-complicated and disconnected from its customers and its roots sound familiar?
So, during 2012 the turnaround began. The new CEO immediately slashed the hefty marketingbudget and began exiting markets around the world. Then dividend payout was scrapped and what has been described as a ruthless cost-cutting programme began.
Carrefour reported a loss of1.8bn for 2011, but last year profits had risen to1.3bn. It has taken more than two years for Carrefours recovery to take shape but Tescos recovery shouldnt take as long.
The company is not restricted by draconian labour laws so costs can be cut faster, and unlike Carrefour, which has had to struggle with high unemployment low economic growth across Europe, Tescos home market is one of the fastest-growing developed economies the world.
Skin in the game
Overall, there some signs that Tescos recovery is taking place, but based on Carrefours recovery, Tesco has 12 to 24 months of work to do before it can claim to be back on the path to growth.
Nevertheless, Tescos managementseemto have a positive view of the companys prospects. At the beginning of thismonth, six of the companys directors spent 550k buying shares in the troubled retailer.
Still, this is just aroughappraisal of Tesco’s prospects. Before making a trading decision, you should conduct your own research to see if the company in question is suitable for your portfolio and financial goals.
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Rupert Hargreaves owns shares of Tesco. 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.