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Tesco turns around to face more unknowns

Tesco's long-awaited turnaround is confirmed.

As well as operating profit leaping 34% to £2.062bn, trumping expectations, Tesco remains atop of Britain’s ultra-competitive market with a thirteenth quarter of underlying sales growth. Tesco’s health remains robust as it grinds towards long-term pillars that have guided CEO Dave Lewis’s turnaround.

  • £532 in-year cost savings bring the total to £1.4bn vs. £1.5bn target
  • Retail operating cash flow reaches £8.6bn, up 2.5bn, against a £6bn goal
  • Operating margin now 3.45% vs. 3.5%-4% target

Yet investor applause has limits. Tesco shares have risen 2.8% at most on Wednesday; appropriate as recovery inches forward. Sensitivity to discounters, e-commerce, the economy and regulatory push-back remains.  Lewis sees no “discernible change in buying behaviour” from Brexit, whilst Tesco’s own planning to safeguard working capital is “proactive”. Yet fall-out will be difficult to predict. Lewis accepts assumptions made when setting recovery targets have been upended. Clouds on the outlook haven’t cleared entirely.

Tesco CFD – daily [10/04/2019 13:04:40]

Source: City Index

TSCO inches above the prior 2019 peak (239p) which may now play support. That would back 21-day exponential moving average (EMA) support at Wednesday’s lows. Divergence between a falling 200-day moving average and advancing 21-day EMA poses some uncertainty. The bias ordinarily should lie with the shorter-term trend, particularly as it’s been rallying since January. But doubts are also reflected in a tailing off MACD that hints at bearish divergence by failing to match TSCO’s latest 2019 high. All told, odds of touching the next main resistance at 245.5p very soon are modest.

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