Tesco to close stores and cut prices as turnaround plan unveiled, shares surge

Tesco saw its share price surge on Thursday after the company announced it would cut costs, close 43 unprofitable stores, lower prices and move its head office, as part of chief executive Dave Lewis's plan to revive the struggling supermarket chain.

The news came as the company unveiled a “broad-based improvement” in UK trading with the like-for-like (LFL) sales decline easing to just 2.9% in the 19 weeks ended 3 January, compared with a 5.4% LFL slump in the second quarter.

What’s more, UK LFL sales fell by just 0.3% over the pivotal Christmas trading period (the six weeks ended 3 January), helped by its ‘Festive Five’ deal where five key produce items were reduced to 49p. LFL sales also jumped 22.2% in the Tesco Direct division over the past holiday season due to Black Friday promotions.

The stock was trading 6% higher 192.95p by 08:05.

Tesco held on to its guidance to deliver a trading profit of “no more than £1.4bn” for the financial year ending 27 February 2015, compared with just £3.3bn the year before.

"We are seeing the benefits of listening to our customers,” said Lewis, who joined the company in September 2014.

“The investments we are making in service, availability and selectively in price are already resulting in a better shopping experience. A broad-based improvement has built gradually through the third quarter, leading to a strong Christmas trading performance,” he said.

As part of the retailer’s plans to regain competitiveness in the UK, the company is shutting down 43 of its stores which are not making a profit and has promised to lower prices further “on some of the nation’s favourite brands”.

It will restructure central overheads, simplify store management structures and increase working-hour flexibility, delivering savings of £250m per year at a one-off cost of £300m.

The group will also hold off from increasing investment in payrolls and introduce a new benefits package for employees, as well as a “turnaround-based bonus”. At the same time however, the company has decided to close its defined benefit pension scheme for all staff.

Head-office locations will be consolidated, with headquarters in Cheshunt due to close in 2016 and Welwyn Garden City becoming the new group centre.

The company said it would cut its capital expenditure substantially to just £1bn in the 2015/20216 financial year, compared with £2.7bn in the year ended February 2014.

“There is more to do but we have taken the first important steps in the right direction,” Lewis said.

LFL sales across the group in the third quarter fell by 3.8%, compared with the second quarter’s 4.8% decline. This eased further to 2.7% over the 19 weeks to 3 January after a decent Christmas performance.

“Tesco may have staunched the bleeding from some of its wounds,” said analyst Alex Joyner from Galvan Research.

While the Christmas performance was better than the market expected, Joyner said: ”It won’t be enough to renew investor confidence just yet”.

Meanwhile, Bryan Roberts from Kantar Retail said Tesco has “a long way to go, but Dave Lewis is pulling the business in the right direction”.