 "Tesco kicks off fightback with cost cuts and asset sales")
Tesco will slash costs and sell assets to fund lower prices and mend its finances, Britain's biggest retailer said on Thursday, as its new boss set out his plan to fight back from years of market share losses and an accounting scandal.
Dave Lewis, poached from Unilever to rescue Tesco from the biggest crisis in its 96-year history, said on Thursday he would halve capital spending, scrap the dividend, consider the sale of the Dunnhumby data gathering business, consolidate head office locations and shut the final salary pension scheme to save cash.
He also named Matt Davies, credited with turning around bicycles-to-car parts retailer Halfords, as the head of Tesco's main UK business and said the company would drop prices by an average 25% on around 380 branded goods to narrow the gap with fast-growing discount grocers Aldi and Lidl as well as Wal-Mart's Asda.
In response to Tesco's plans, rating agency Moody's downgraded the company's short-term ratings to 'Not Prime' or junk status.
"We have downgraded Tesco's ratings because of our expectation that the structural changes in the UK grocery retail market will continue to challenge the company's operating performance," said senior analyst and lead analyst for Tesco Sven Reinke.
Rating agency Fitch said it was maintaining its BBB- rating, one notch above junk.
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Tesco shares rose as much as 15% in their biggest one-day gain since 1988, as shareholders expressed relief it had not asked them for cash and also took heart from a smaller-than-expected drop in Christmas sales.
"The direction of travel and the tone is much more in line with what we think is in the best interests of long-term shareholders," said Nick Kirrage, a fund manager at Tesco's eighth-biggest investor, Schroders.
Lewis stressed that Tesco's liquidity and funding were "very secure."
"There's absolutely no way in the world, no need at all, for there to be any sort of fire sale around Tesco assets," he said.
Some analysts say Tesco may need to sell or spin off some of its businesses in Asia or eastern Europe to raise cash.
Chief Financial Officer Alan Stewart said that while Tesco would "never say never" to a rights issue, that would be a last resort.
Analysts said even more price cuts would be needed.
"We wonder whether the eventual verdict ... on today's Tesco news will be 'too little too late,'" said independent retail analyst Nick Bubb.
Lewis, dubbed "Drastic Dave" for his radical overhaul of Unilever businesses and the first outsider to lead Tesco, stressed his proposals were just a start and that further initiatives would follow.
SECURING THE FUTURE
After two decades of uninterrupted growth during which it dominated British retailing, Tesco lost its way when it became distracted by expensive overseas expansion and failed to spot the threat from discounters.
It was wrong-footed too by a boom in local and online shopping that took customers away from its huge out-of-town stores.
Hit also by an accounting scandal, it issued four profit warnings in five months last year, and is expected to report a nearly a 60% plunge in trading profit for its 2014-15 year.
With net debt of 7.5 billion pounds ($11.3 billion) versus equity of 16.8 billion pounds, Lewis said, the company had to cut back.
The retailer will slash capital spending to 1 billion pounds next financial year, compared with the nearly 5 billion pounds it spent as recently as 2008-9, and close 43 unprofitable stores as well as can 49 planned developments.
With plans to close the company's head office in Cheshunt, north of London, and shut its existing pension scheme, Lewis said, annual costs would fall around 250 million pounds a year.
He declined to put a figure on potential job losses.
"The decisions we've taken today have wide-reaching implications for just about every stakeholder in our business," he said. "Securing the future of the business means making those choices."
Lewis said Tesco would focus on lower, and simpler, prices, with fewer promotions that have confused shoppers and frustrated suppliers alike.
There were signs that early moves to cut the prices of some core staples such as vegetables over Christmas were working, with UK like-for-like sales falling a smaller-than-expected 0.5% versus a 4.4% drop in the previous three months.
Tesco said it had appointed Goldman Sachs to explore options for Dunnhumby, which could include a stock market flotation or a sale. Analysts value the business at 1 million to 2 billion pounds.
It also said it had sold its Blinkbox digital entertainment service and Tesco Broadband to TalkTalk for an undisclosed sum.
($1 = 0.6639 pounds)