Tesco First-Half Profit Gains as International Sales Rebound

Tesco Plc Chief Executive Officer Terry Leahy marked his last announcement of the U.K. retailer’s results by reporting profit that beat estimates and forecasting an earlier end to U.S. losses than some had anticipated.

So-called trading profit, a measure which excludes property gains, climbed to 1.69 billion pounds ($2.67 billion) in the six months ended Aug. 28, from 1.55 billion pounds a year earlier, the U.K.’s largest retailer said today. That beat the 1.61 billion-pound median estimate of seven analysts surveyed by Bloomberg. Tesco rose as much as 1.8 percent in London trading.

The 145-store Fresh & Easy chain should become profitable in fiscal 2013 as it double openings to two a week in the next 12 months, said Leahy, who has had to contend with losses at the U.S. unit since its creation in 2007. The CEO also reported a “sharp improvement” in Asian markets such as Thailand and Korea, which have helped drive sales growth at Cheshunt, England-based Tesco since Leahy took the helm in 1997.

“The departing chief executive leaves a steady ship which is poised for further success,” said Richard Hunter, head of U.K. equities at Hargreaves Lansdown. “After a rocky start, the U.S. business sees profitability emerging on the horizon.”

Tesco shares were little changed at 430.25 pence at 11:23 a.m. in London, after rising as high as 438 pence. The stock has gained less than 1 percent this year, lagging behind the 20 percent gain of domestic competitor J Sainsbury Plc.

Fresh & Easy, which had a first-half loss of 95 million pounds, will open 19 stores in the second half, said Leahy, who is due to retire in March and be replaced by Philip Clarke, Tesco’s director of international operations.

‘Positive Surprise’

A combination of increasing sales per store and a larger network of outlets in California, Arizona and Nevada will drive the chain to profitability, the CEO said.

The Fresh & Easy profit target is a “big, positive surprise” and is three years earlier than expected, according to Clive Black, an analyst at Shore Capital in London.

International sales at stores open at least a year rose 4.1 percent in the second quarter, after being unchanged in the first quarter, Tesco also said today.

Asia, where trading profit rose 30 percent, is probably Tesco’s “star market,” Finance Director Laurie McIlwee told On The Move with Francine Lacqua on Bloomberg Television.

To compensate for slowing growth in its domestic market, the U.K. retailer is spending 2 billion pounds developing shopping malls in China and plans to extend its hypermarkets and franchise convenience outlets in South Korea. The CEO said Tesco would be interested in Carrefour SA’s south-east Asian assets, though it depends on the price and value.

U.K. Economy

“It would make sense for us to look at those assets,” he said. “We’ve got strong businesses in Thailand and Malaysia.”

Carrefour aims to sell its units in Thailand, Malaysia and Singapore and focus its Asian operations on China and Indonesia.

Tesco’s Japanese unit, which was the only market not to report same-store sales growth, will carry on reshaping its stores into smaller-format Express convenience outlets even as the country’s economy “blows a hurricane,” Leahy said.

Economic recovery in the U.K. has been “a bit slower than expected,” Leahy said in a phone interview.

“It’s just slower and steadier” than the international markets, he said. Spending may be spurred after the anniversary of increases in gasoline prices last fall, which reduced the average family’s monthly budget by about 20 pounds, he said.

Tesco also announced today that Tesco Bank will introduce mortgages in the first half of next year and customer bank accounts in the second half of fiscal 2012.

Photographer: Mikel Laburu/Bloomberg

The retailer is about to embark on a management reshuffle with director of international operations Philip Clarke, seen here, taking over from CEO Terry Leahy in March. Close

The retailer is about to embark on a management reshuffle with director of... Read More

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Photographer: Mikel Laburu/Bloomberg

The retailer is about to embark on a management reshuffle with director of international operations Philip Clarke, seen here, taking over from CEO Terry Leahy in March.

First-half net income climbed 15 percent to 1.18 billion pounds, while sales increased 8.3 percent to 32.9 billion pounds, including value-added tax.

“These results tick many if not most boxes, and the outlook for group returns looks positive,” said Justin Scarborough, an analyst at RBS, with a “buy” rating. “Sales recovery is gaining momentum in its international markets.”

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

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