Exploring options: Tesco chief Dave Lewis

Dave Lewis on Thursday demonstrated his willingness to turn holy cows into Tesco Finest burgers by announcing the closure of the troubled grocer’s historic Cheshunt headquarters.

He told journalists, with something approaching a snarl, that he is “not a Tesco historian”. Good. Predecessor Philip Clarke failed because he was too respectful of the legacy bequeathed by the likes of Sir Terry Leahy. Tesco has been based at Cheshunt since 1973. But you cannot imagine the store chain’s hard-nosed founder Sir Jack Cohen objecting. His motto was “you can’t do business sitting on your behind”. Downsizing to an outpost elsewhere in Hertfordshire is part of a plan to reduce head office overheads by 30 per cent. Other crowd-pleasing cuts include closing 43 stores and the defined benefit pension scheme.

Mr Lewis has shrewd timing. He softened up investors with a profits warning in December. They had already been tenderised by an accounting scandal that predated his appointment. On Thursday he gave reassurance via a third-quarter update that maintained full-year profits guidance of £1.4bn and revealed Christmas trading had been less bad than expected.

The sale of Blinkbox and Tesco Broadband to quadplayer TalkTalk is valuable only as a statement of intent. The cash proceeds will be negligible. Goldmans will advise on the flotation or disposal of data group Dunnhumby, which could be worth £2bn. Tesco Bank carries a similar valuation, Tesco Asia five times that.

Net debt to underlying earnings has risen from 1.8 to 2.8 times in under a year, according to S&P CIQ. But cutting the final dividend, combined with possible disposals, reduces the pressure for a rights issue. Tesco has a chance of shrinking to fit a market position narrowed by price competition and changing shopping habits.

Piquantly, Marks and Spencer, the UK retailer most burdened with legacy expectations, announced lousy Christmas trading in clothing, the product area most encumbered. History is the nightmare from which we are trying to awake, James Joyce wrote. Tesco shows early signs of coming around. The shares rallied accordingly. M&S, sadly, is still out for the count.

Going loco

If Trainline were a locomotive, what kind would it be? Would the online rail ticket business, which aspires to float, be “bound for glory” as Sister Rosetta Tharpe insisted? Or would it be a “Train in Vain”, as Mick Jones put it, his view coloured by travelling on British Rail in the dismal 1970s?

That depends on price. At a mooted enterprise value of over £640m, the private equity-owned group would float on a multiple of 23 times trailing earnings. That looks pricey compared with some other online plays. These include boohoo.com, a schmutter website that warned on profits this week and now trades at 14 times earnings. Property portal Zoopla, a better proposition, is at 19 times.

This column was bearish on UK internet floats last year. With the glaring exception of Just Eat, we were right. Shares in the bulk of these companies are at deep discounts to their starting prices.

Given this context, Trainline would need to be special to command a premium. Its flotation announcement offers no knockout evidence. The website ranks as fifth largest in the UK by transaction value. But margins on 2014 sales of some £1bn were slim.

Rent seeking is an unremarked element in the mission of many online businesses. Moralists may have qualms. Investors will want to know how securely rents can be nailed down. Trainline does not aggregate items from many disparate vendors, creating barriers to entry as eBay and Rightmove do. It has no compelling price advantages. Trainline could be a “Slow Train Coming” in justifying a steep float price, to quote Bob Dylan in a context the troubadour would doubtless hate.

I’m with stupid

Bad statistics become powerful when people rely on them. A battle between our old chum the Retail Prices Index and the Institute of Fiscal Studies has therefore resulted in a draw.

The IFS says the calculation of RPI is flawed— something to do with the way averages for items like handbags are calculated, apparently. But doing proper sums might scare gilts investors. So dodgy maths prevails for old bonds, even as ministers mull arithmetical probity for new ones.

Other bad stats endorsed by the tyranny of custom have included the US’s Dow Jones Industrial, a discredited stock index, and the Barnett Formula, which doles out UK budgetary pork to Scotland. Debunking bad stats has brought the FT’s Tim Harford a radio career and listeners enlightenment. But leave us poor sinners a few rickety crutches to lean on, eh, Tim? Finance and its coat-tailing punditry is well-nigh impossible, otherwise.


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