Tesco Commits to Overseas Markets Amid ‘Atrocious’ Sales

Tesco Plc, the biggest U.K. grocer, said it’s committed to fixing its international businesses after same-store sales declined in all nine markets and European profit plunged in the first half.

“We’ll fight our way through a difficult macro environment” in Europe, Chief Financial Officer Laurie McIlwee said on a conference call today, batting aside suggestions that the retailer may seek to exit more countries after quitting the U.S. and Japan, while ceding control of its business in China.

Tesco’s businesses in Europe and Asia are showing signs of distress similar to those of the company’s domestic business about two years ago. The retailer, which gets about a third of sales outside the U.K., faces rising competition from budget stores and convenience chains in countries from Thailand to Poland. Rushing to exit may not be the answer, said Richard Marwood, who helps oversee more than $700 billion at Axa Investment Managers.

“We’re not a believer in that the minute something goes wrong you need to cut it in its entirety,” said London-based Marwood. “Looking at the state of the European economy, is it an amazing surprise they haven’t done particularly well?”

Tesco shares fell as much as 4.7 percent, the most in four months, on disappointment at the retailer’s international performance in the first half of the year. That cut the grocer’s market value by about 1.3 billion pounds to 27.7 billion pounds ($45 billion). The stock was down 1.7 percent at 3:20 p.m.

‘Pretty Atrocious’

Operating profit in Europe slid 68 percent to 55 million pounds. Like-for-like sales in the region fell 5 percent as shoppers in Ireland defected to cheaper offerings and Turkish customers shunned the grocer’s large-store formats. Losses in Turkey increased “significantly,” the company said.

Business in some markets was “pretty atrocious,” Darren Shirley, an analyst at Shore Capital, said in a note, citing same-store sales declines of 13 percent in Turkey, 6.4 percent in Poland and 6.9 percent in the Czech Republic. “Europe most certainly needs attention from Tesco’s management.”

The retailer also struggled in Asia, where operating profit fell 7.4 percent to 314 million pounds amid restrictions on store opening hours in South Korea, its biggest market outside the U.K.

Tesco doesn’t intend to exit Turkey and doesn’t feel the same about its operations in central Europe as it did about the U.S. and Japan, McIlwee said on the call.

European Margin

The grocer agreed to sell most of its Fresh & Easy chain in the U.S. to a company owned by billionaire Ron Burkle last month, ending a failed six-year foray into the world’s biggest economy. Last year, it paid 40 million pounds to exit Japan. Tesco today said it would pay $558 million to fold its Chinese hypermarkets into a joint venture with China Resources Enterprise Ltd. It announced talks for that deal in August.

Tesco’s trading margin in Europe has dropped to 1.2 percent of sales from 3.5 percent in the last financial year and almost 5 percent two years ago. That won’t recover until “the euro zone is getting back to where it was,” McIlwee said. “Europe is a very difficult place to retail at the moment.”

Investments in price and quality in Poland should boost sales in the second half, McIlwee said. In Turkey, Tesco will seek to boost sales at about 30 stores in the eastern part of the country where business is struggling, unlike outlets in the more affluent area around the Mediterranean, McIlwee said.

Even so, that part of the Turkish business is probably being ring-fenced “for disposal or closure,” while Tesco may still “consider exiting” Poland, BNP Paribas analyst John Kershaw said in a note today.

Domestic Struggle

The retailer’s international struggles come at a time when the company is seeking to revive growth at home.

U.K. same-store sales, excluding petrol and value-added taxes, were unchanged in the second quarter, Tesco said today, matching analyst estimates for that measure. That was an improvement from the 1 percent decline in the first quarter.

Competitor J Sainsbury Plc today reported 2 percent growth in second-quarter same-store sales, excluding gasoline, an outcome that matched analysts’ estimates.

Tesco said it expects to show an “improved trading performance” in the second half, noting that investments in Europe are already having an effect after a “challenging retail environment” in the first half. The company repeated its goal of mid-single digit trading profit growth in the medium term.

First-half trading profit at the Cheshunt, England-based retailer fell 7.6 percent to 1.59 billion pounds, compared with the 1.62 billion-pound median estimate of 13 analysts.

British Chicken

After its first profit annual drop in almost two decades last year, Tesco has been investing in improving the quality of its own-brand products and is revamping its hypermarkets with bakeries, gourmet coffee and tapas while adding outlets like Harris & Hoole coffee shops and Giraffe restaurants to the premises to make them more desirable destinations.

Improvements to the domestic food offer have included getting all fresh chicken from U.K. producers, and all beef products from Britain and Ireland, the company said.

Still, shoppers are defecting both to budget competitors like Aldi and higher-end shops such as Waitrose. Tesco’s market share fell to 30.2 percent in the 12 weeks ended Sept. 15 from 30.9 percent a year earlier, Kantar Worldpanel said Sept. 25.

Having done “a lot of necessary, hard and good work” over the last three years, Chief Executive Officer Philip Clarke still has more to do before “the corporate bar feels less heavy,” Shirley at Shore Capital wrote today.

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