Tesco Exits U.S. After First Profit Drop in About 20 Yrs

Tesco Plc, the U.K.’s largest retailer, said it will exit the U.S. and scale back domestic expansion at a cost of about 2 billion pounds ($3 billion) as it reported the first annual profit drop in almost 20 years.

Dumping the U.S. Fresh & Easy chain after about six years cut profit by 1.2 billion pounds, the Cheshunt, England-based supermarket company said today. Tesco also took an 804 million-pound charge to write down the value of property held for development as it opens fewer new stores at home, and announced charges in both its European and financial-services units.

Chief Executive Officer Philip Clarke is retreating from international markets and downsizing domestic store expansion as the grocer struggles to maintain its dominant share at home. The retailer, whose U.K. market share has slipped below 30 percent as customers have polarized toward discounters such as Aldi and upscale chains like Waitrose Ltd., plans to focus on growing its online and convenience-stores to meet changing shopping habits.

“All the writedowns were pretty messy, let’s hope it’s to just get all the bad news out at once and clear the decks,” said Paul Mumford, a fund manager and Tesco shareholder who helps manage 850 million pounds of investments for Cavendish Asset Management in London. “It’s going to be a long slog.”

Shares Slide

Tesco fell as much as 4.8 percent in London trading. The drop was the steepest since Jan. 12, 2012, the day that the company cut profit guidance for the first time in years. The shares were down 3.3 percent at 372.35 pence as of 11:23 a.m.

“The market is a bit spooked but that’s not really warranted,” said Richard Marwood, who helps manage 554 billion euros ($730 billion) at Axa Investment Managers in London and holds Tesco stock. “Tesco is doing a bit of a clearout and with the aim of freeing up cash and that could be good news.”

The form of the U.S. exit has still to be determined, Tesco said, adding that Fresh & Easy will become a discontinued unit. Buyers have shown a “lot of interest” in the chain and Tesco is most attracted to those who want to take over Fresh & Easy as a going concern, Chief Financial Officer Laurie McIlwee told reporters on a conference call. He said it will take “at least another three months” before the withdrawal is complete.

Fresh & Easy is most likely to be split between competing buyers rather than sold in its entirety, according to David Gray, an analyst at Planet Retail in London.

European Charge

Tesco has invested about 1 billion pounds in the U.S. since creating the business in 2007, targeting the West Coast with a series of neighborhood urban stores in a market dominated by big-box supermarkets. Fresh & Easy distinguishes itself with a focus on budget-priced, healthy food and a predominance of own-brand items. Tesco said Dec. 5 it would likely exit the U.S. after appointing investment bank Greenhill to undertake a strategic review of the El Segundo, California-based business.

After departing the U.S. “we’re in the right international markets for long-term growth,” Clarke said on the call.

Tesco said so-called trading profit fell 13 percent to 3.45 billion pounds in the year to Feb. 23, topping the 3.4 billion-pound median estimate of 12 analysts compiled by Bloomberg.

After including one-time charges and losses related to the U.S. withdrawal of 2.6 billion pounds, full-year net income plunged 96 percent to 120 million pounds, the statement shows.

Tesco booked a charge of 495 million pounds against full-year profit to reflect “differing growth prospects in today’s environment” for businesses it acquired in Poland, the Czech Republic and Turkey in the last two decades.

Trailing Competitors

The retailer also charged 115 million pounds against annual profit for compensating customers of its banking unit who were improperly sold payment protection insurance prior to 2007. Banks including Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc have set aside more than 13 billion pounds to compensate customers who were mis-sold the insurance.

U.K. same-store revenue rose 0.5 percent in the final quarter, excluding gasoline and value-added tax, which Tesco said was the strongest growth in three years.

The growth still trailed competitors. J Sainsbury Plc last month reported a 3.6 percent gain in fourth-quarter sales on the same basis, while Marks & Spencer Group Plc said last week that U.K. food sales rose 4 percent at stores open at least a year.

Clarke is investing 1 billion pounds to smarten up the supermarkets and hire more staff in an effort to bolster the domestic business.

“The market is not entirely convinced by the work in progress,” said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers in London. “It will be a slow process before the company can hope to recapture its former glory.”

Korean Restrictions

International trading profit fell 22 percent to 990 million pounds. Same-store sales in the retailer’s European businesses declined 4.5 percent in the fourth quarter, the weakest performance in at least three years, hurt in particular by weak demand for non-food items, the company said.

Tesco’s Asian business has been hurt by new restrictions on opening hours in South Korea, pushing down trading profit in the region by 10 percent to 661 million pounds.

Tesco said it aims to deliver “mid-single digit” growth in trading profit in the years ahead and to increase dividends “broadly in line” with underlying earnings.

The retailer plans to pay an unchanged dividend for last year of 14.76 pence a share, which it said reflects confidence that measures being taken to revive the business “will set the group on track to resume growth in 2013/14 and beyond.”

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