Tesco Gains as Better Signs in Europe Offset U.K Slump

Tesco Plc, the U.K.’s largest retailer, rose in London trading as quarterly sales advanced in some European markets, helping offset the weakest domestic performance in recent history.

The shares gained 2.6 percent to 293.8 pence after full-year earnings at the international unit fell by less than some analysts expected amid a resumption of same-store sales growth in four European markets in the final quarter. They had climbed as much as 5.5 percent, the most since April 2009.

“The results aren’t pretty, but they are possibly slightly better than some had feared,” said Richard Marwood, who helps oversee $700 billion in assets at Axa Investment Managers in London, including the supermarket company’s shares.

Tesco today reported its worst domestic sales performance since Chief Executive Officer Philip Clarke took office three years ago as more shoppers defect to discounters Aldi and Lidl. Clarke, whose chief financial officer resigned this month, is fighting two years of declining revenue at home and abroad, though today reported a restoration of quarterly sales growth in Hungary, Poland, the Czech Republic and Turkey.

“It’s the relief of the absence of another shock and slightly better numbers in Europe,” said John Kershaw, an analyst at Exane BNP Paribas in London. “Ultimately though, delivering in the U.K. is required to support the shares.”

Today’s gain in the shares trimmed their decline this year to 12 percent. They have fallen in each of the last four years.

Lower Profit

So-called group trading profit dropped 6 percent to 3.32 billion pounds ($5.6 billion) in the year ended Feb. 22, the Cheshunt, England-based company said today, compared with the 3.23 billion-pound average estimate of 13 analysts.

The grocer said fourth-quarter same-store sales fell 2.9 percent in the U.K., excluding gasoline, the weakest quarterly performance since at least 2001, according to Sanford C. Bernstein analysts. Tesco also wrote down the value of its European assets by 734 million pounds and its discontinued operation in China by 540 million pounds.

Clarke embarked on a second U.K. revival plan in as many years in February after a 1 billion-pound investment in stores, staff training and artisan bakeries and coffee shops failed to stem shoppers’ defection to budget chains Aldi and Lidl.

The German discounters have gained market share with low prices on both everyday and luxury items, holding a combined 8 percent in the 12 weeks ended March 30, up from 6.3 percent a year earlier, according to researcher Kantar Worldpanel. Tesco lost more than 1 percentage point in market share in that period to 28.6 percent from 29.7 percent a year earlier.

Price Cuts

Clarke responded Feb. 25 by saying Tesco will invest 200 million pounds a year in permanent cuts to prices on everyday items. That investment has reduced prices of key products such as milk, eggs, chicken and vegetables by an average of by 24 percent, he said today on a conference call.

“There are more to come in the weeks ahead,” Clarke said. Those price cuts, along with the ending of complex promotions and a revamp of Tesco’s general-merchandise range, means same-store sales will be “challenged” in the first half of this year, he said.

For now, Tesco’s prices on key produce lines are as much as 40 percent more expensive than Aldi and even more costly than the upscale Waitrose, an April survey by Espirito Santo found.

Aldi and Lidl are “formidable” competitors, Clarke said today. “If you are trying to be lower than them they won’t let you, so you need to be different.”

CFO Sought

As well as cheaper prices, Tesco is also seeking to win shoppers back with more convenience stores, better-looking large supermarkets housing restaurants and coffee shops, an improved online business, the Hudl affordable tablet, and Blinkbox, a digital movie, music and book platform.

“We’re confident about the initiatives,” the CEO said on the call. “We’re monitoring our progress and the response of our competitors. Our plans allow us to take further action if we judge it necessary.”

At the same time as having to fix the U.K. business, Clarke is seeking a new chief financial officer following this month’s resignation of Laurie McIlwee amid reports of a strategy clash. He’s also trying to turn around the grocer’s performance internationally, with same-stores sales declining last year in all but one of nine overseas countries where Tesco is present.

Going Nowhere

Clarke today batted away questions about his own position.

“I’ve got no intention of going anywhere,” he said on the call. “All my waking hours are spent running Tesco, it’s what I love. I’m going to see this thing through.”

Tesco said today it has revised long-term budgets for its business in Europe in light of their declining profit, leading to the one-time charge for asset impairment. Total one-time charges in the year were 801 million pounds, it said, giving group pretax profit of 2.26 billion pounds.

The Chinese operation is now treated by the company as discontinued. Tesco in October agreed to pay state-owned China Resources Enterprises $558 million for a 20 percent stake in a new retail venture, combining the U.K. retailer’s 134 outlets and shopping mall business in that country with CRE’s chain of about 3,000 stores. That ended a decade of independent operations in the world’s most-populous nation.

Tesco is currently in the early stages of negotiations over the future of its unit in Turkey. The grocer has a range of “realistic alternative options” should the talks break down, Clarke said today.

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