January 5, 2015 / 5:18 PM / 3 years ago

Cost cuts, asset sales and writedowns in store for Tesco

LONDON (Reuters) - New Tesco (TSCO.L) boss Dave Lewis is expected to focus on cost cuts and asset sales when he provides an update on his plans to revive the troubled British grocer’s fortunes on Thursday.

Signage is seen at a Tesco supermarket in central London, December 9, 2014. REUTERS/Toby Melville

Britain’s biggest retailer, reeling from an accounting scandal and four profit warnings that halved its share price last year, could also detail substantial property asset write-offs to reflect the diminishing value of large out-of-town stores and development land, analysts have said.

Tesco will also report on third-quarter sales and the key Christmas trading period.

The accounting scandal led to the exit of several senior executives and sparked a series of investigations, including by Britain’s Serious Fraud Office, and raised the specter of possible investor lawsuits in Britain and the United States.

Lewis was parachuted in from Unilever (ULVR.L) in September and said last month that detail on measures to strengthen Tesco’s balance sheet and improve its competitiveness would be forthcoming on Jan. 8.

However, he has repeatedly stated that investors should not expect him to lay out a major strategic blueprint for the next three years or put a figure on how many hundreds of millions of pounds he will invest in price cuts to narrow the gap with German discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL] in an attempt to stem its loss of market share in Britain.

With Tesco’s debt rated by Moody’s at one notch above junk status and under review for further downgrade, the need to shore-up its balance sheet is pressing.

In October Tesco cut its interim dividend by 75 percent and investors expect little or no payout at the full-year stage.

Analysts expect cost cuts to be wrung from reducing Tesco’s head office staff of about 4,000 and consolidating the firm’s 32 UK offices. Tesco’s different store formats could also work together to use their buying power more effectively.

Lewis’s stated preference is to raise funds by reducing costs and selling assets rather than issuing equity, while investors have told Reuters that they would rather the group sold or floated assets before they would consider a rights issue.

POTENTIAL DISPOSALS

Lewis could signal that Tesco is exploring the possible sale of its data analytics business Dunnhumby, estimated by analysts to be worth 2-3 billion pounds ($3.04-$4.56 billion).

Other possible disposals include its Thai business. Valued by analysts at about 5 billion pounds, the operation has already drawn the interest of Charoen Pokphand, Thailand’s largest agribusiness conglomerate.

Its South Korean business, with an estimated value of around 4 billion pounds, is another candidate, as is the possible sale of a stake in Tesco Bank.

Peripheral operations, such as video-streaming business Blinkbox, are expected to go but will not raise much cash. TalkTalk (TALK.L) is in advanced talks to buy Blinkbox, according to a source familiar with the matter.

Cantor Fitzgerald analyst Mike Dennis reckons Tesco could signal 4 billion pounds of asset sales, a 2 billion pound writedown on British land and existing supermarkets, head office closure savings of 250 million pounds and annual cost reductions of 500 million pounds.

Tesco declined to comment.

Lewis said in December that Tesco’s third-quarter performance was slightly better than its showing in the first half of the year, when same-store sales fell 4.6 percent.

HSBC (HSBA.L) analyst David McCarthy expects Tesco’s trading to show improving momentum. He forecasts like-for-like sales down 2.5 percent over the six-week Christmas trading period, with the grocer benefiting from extra staff in the stores and improved pricing.

However, joint house broker Deutsche Bank (DBKGn.DE) forecasts a 4.3 percent drop in like-for-like sales in the Christmas period.

With austerity-era shopping habits having become entrenched among British consumers, the discounters have stolen share from all of Britain’s so called Big Four grocers and analysts don’t expect any of them to exceed last year’s Christmas performance on a same-store basis.

Sainsbury’s (SBRY.L), is scheduled to report on Jan. 7, followed by Morrisons (MRW.L) on Jan. 13 and Asda (WMT.N) on Feb. 19.

($1 = 0.6572 pounds)

Additional reporting by Paul Sandle; Editing by David Goodman

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