Tesco Profit Misses Estimates, U.K. to Remain ‘Challenging’

Tesco Says Full-Year Profit Rises 14% to 2.66 Billion Pounds
A customer loads his shopping cart with groceries at a Tesco supermarket in London. Photographer: Chris Ratcliffe/Bloomberg

Tesco Plc, the U.K.’s largest supermarket company, reported full-year earnings that missed analysts’ estimates and said it expects the domestic market to remain “challenging” after a drop in fourth-quarter sales.

So-called trading profit rose 7.8 percent to 3.68 billion pounds ($6 billion) in the year ended Feb. 26, the Cheshunt, England-based retailer said today. The average estimate of 15 analysts surveyed by Bloomberg was 3.74 billion pounds. Asia and Europe contributed almost 70 percent of the profit growth, while losses widened at the U.S. Fresh & Easy chain, Tesco said.

Chief Executive Officer Philip Clarke, who took over from Terry Leahy in March, faces a stagnant grocery market in the U.K., the retailer’s largest by revenue, where growth is being driven mostly by inflation. Tesco said it plans to give more space to non-food items and add new general-merchandise ranges. More than three-quarters of store openings in the coming year will be in international markets such as China.

“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, said by e-mail. “The shares are too cheap if Tesco can execute better in the U.K., drive higher international returns and generate cash.” Dorgan has a “buy” rating on the shares.

Shares Drop

Tesco fell 4.35 pence, or 1.1 percent, to 395.65 pence at 8:21 a.m. in London trading. The stock has fallen 6.8 percent this year, compared with rival J Sainsbury Plc’s 9.9 percent decline and a 1.9 percent fall at Carrefour SA.

Sales at U.K. stores open at least a year fell 0.7 percent in the fourth quarter, excluding value-added tax and gasoline, said Tesco, whose domestic market share has hovered around 30 percent for more than five years.

“Customers are looking for value, they’re eating out less, they’re using their car less,” CEO Clarke said on a conference call. “That’s why we’re saying specific steps include a greater level of innovation, much more effort on food, and a big push to reallocate space and bring new ranges in general merchandise, into home, into non-food.”

The retailer said Asia, Europe and the U.S. should benefit from the improvements in the global economy. Tesco will add 11 million square feet (1.02 million square meters) of new space this year, a similar level to last year, Finance Director Laurie McIlwee said on the call. About 8.4 million square feet of that will be outside the U.K.

5,000 Stores

Tesco, which has more than 5,000 stores in 14 countries, plans to sell and lease back up to 1 billion pounds of property including assets in U.S. and China annually to fund expansion.

“This could be an opportunity for Philip Clarke to make his mark,” Execution Noble analyst Caroline Gulliver said before the release. “We do not think Tesco’s performance has been significantly worse than its competitors in the U.K. and we think the international growth opportunity is excellent.” Gulliver has a “buy” recommendation on the shares.

The trading loss at the U.S. Fresh & Easy chain widened to 186 million pounds in the year 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, a 10.8 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.

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