Tesco CEO Plans New Ranges to Address ‘Below Par’ U.K. Profit

Tesco Plc (TSCO)’s new Chief Executive Officer Philip Clarke plans to introduce extra food ranges and broaden its offering of non-food goods to address last year’s “below par” profit at the largest U.K. supermarket chain.

The retailer’s domestic business has “lost a bit of momentum,” Clarke said today on a conference call. U.K. profit growth last year was “below plan,” according to the CEO, who took over from Terry Leahy in March.

Tesco today reported full-year earnings that missed analysts’ estimates and said the domestic market is likely to remain “challenging” after sales slid in the fourth quarter. About 70 percent of profit growth last year came from operations in Asia and Europe, according to Tesco, whose domestic market share has hovered around 30 percent for more than five years.

“The picture in the U.K. market is looking increasingly bleak,” Richard Hunter, head of U.K. Equities at Hargreaves Lansdown Stockbrokers, said by e-mail.

Tesco fell 4.45 pence, or 1.1 percent, to 395.55 pence at 11:41 a.m. in London trading. The stock has fallen 6.9 percent this year, compared with rival J Sainsbury Plc’s 10 percent decline and a 2 percent fall at Carrefour SA.

Tesco, based in Cheshunt, England, will extend its online offer of general merchandise, electronic goods and clothing by almost four times to 100,000 products and plans more “sharpness” in its communication with shoppers, Clarke said.

Expansion Plans

“The new CEO is clearly aiming to drive further growth, both through innovation and the release of capital for further expansion,” said Hargreaves Lansdown’s Hunter.

Tesco, which has more than 5,000 stores in 14 countries, plans to sell and lease back as much as 1 billion pounds ($1.6 billion) of property including assets in U.S. and China annually to help fund expansion. About 11 million square feet (1.02 million square meters) of new space will be added this year, Finance Director Laurie McIlwee said on the call, of which about 8.4 million square feet will be outside the U.K.

U.K. same-store sales declined 0.7 percent in the fourth quarter, excluding gasoline and value-added tax, Tesco said. Non-food revenue “faltered” since November, particularly sales of higher-priced non-essential items.

“It was not an easy consumer environment through last year and current conditions are clearly still challenging,” as households tackle higher fuel costs, rising inflation and public sector cuts, Clarke said on a conference call with analysts.

‘Work to Do’

“We’ve got some work to do,” the CEO said. “The issues are not structural, it’s really all about the detail.”

So-called trading profit rose 7.8 percent to 3.68 billion pounds in the year ended Feb. 26, Tesco said today. The average estimate of 15 analysts surveyed by Bloomberg was 3.74 billion pounds. Tesco defines trading profit as earnings before tax, property gains and one-time costs. Earnings on that basis rose 3.8 percent to 2.5 billion pounds in the U.K.

“The headline numbers are slightly disappointing, particularly in the U.K., where Tesco’s non-food offer clearly needs some work,” Philip Dorgan, an analyst at Panmure Gordon in London, said by e-mail. He has a “buy” rating on the stock.

The trading loss at the U.S. Fresh & Easy chain widened to 186 million pounds in the year from 165 million pounds a year earlier as the unit bought two suppliers.

Trading profit in Asia climbed 30 percent to 570 million pounds, boosted by sales in Thailand and South Korea. China, where the retailer is opening five-storey shopping malls, failed to make a profit in the second half, weighed down by “slower consumer demand growth” and fewer store openings than planned.

Total revenue for the year rose 7.1 percent to 60.9 billion pounds, excluding value-added taxes.

Tesco plans to pay a total dividend for the year of 14.46 pence a share, an 11 percent increase on the previous year.

Net income for the year rose to 2.66 billion pounds, or 32.94 pence a share, from 2.33 billion pounds, or 29.19 pence, a year earlier, the retailer said.

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

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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