Tesco Reports First Profit Decline in Almost Two Decades

Tesco Plc (TSCO), the U.K.’s largest retailer, reported the first profit drop in almost two decades after increasing investment to halt declining supermarket sales.
So-called trading profit fell 11 percent to 1.59 billion pounds ($2.6 billion) in the first half of the financial year, also hurt by reduced earnings in South Korea and central Europe, Cheshunt, England-based Tesco said today. The average estimate of 12 analysts compiled by Bloomberg was 1.62 billion pounds
Chief Executive Officer Philip Clarke said it’s too early to call a turn after U.K. same-store sales snapped a run of six straight quarterly declines in the second quarter. The 0.1 percent sales increase trailed a 1.9 percent gain reported today by competitor J Sainsbury Plc. (SBRY) Clarke has pledged to invest 1 billion pounds in new products, additional staffing and Tesco’s 2,900 U.K. stores as he seeks to rebound from a seven-year low in market share.
“There is little in these results to give investors confidence Tesco will return to being a double-digit growth story in the near term,” said Caroline Gulliver, an analyst at Espirito Santo. She has a neutral recommendation on the stock.
Tesco fell as much as 2.1 percent in London trading and was down 1.3 percent at 332.5 pence as of 9:33 a.m. The shares have fallen 18 percent this year, while Sainsbury has gained 15 percent. Sainsbury rose 0.6 percent to 349 pence at 9:33 a.m.
Modernization Work
Tesco said changes being made to its domestic business are being favorably received by customers.
More than 8,000 staff have been added, while about 230 stores have undergone modernization work, the company said.
“The changes are coming through at a pace,” Clarke said on a conference call. “Customers are starting to tell us they like what they’re seeing. I wouldn’t be saying we’ve turned the corner, we’re on the road.”
The 0.1 percent increase in U.K. same-store sales, reported on a basis that excludes fuel and value-added tax, was the first since the third quarter of the 2011 financial year.
The second-quarter performance “tell us that its underperformance in the U.K. may well have bottomed out,” said Bryan Roberts, an analyst at Kantar Retail in London.
Sainsbury Sales
Sainsbury’s same-store sales growth accelerated from 1.3 percent in the previous quarter, excluding gasoline. The third- largest U.K. supermarket chain said its own-label range and money-off vouchers helped win price-conscious shoppers.
Sainsbury said its price perception among shoppers is improving because of the Brand Match campaign, which offers shoppers a coupon if the same product is available for less at Tesco or Wal-Mart Stores Inc.’s Asda. More than half the time Sainsbury is cheaper, Chief Executive Officer Justin King said.
The external environment “continues to present challenges all over the world,” Tesco’s Clarke said. The retailer gets about a third of sales and earnings from outside of the U.K.
In South Korea, Tesco’s second-largest market after Britain, profit was hurt by restrictions to store opening hours. All of its stores, including convenience outlets, are now closed for two Sundays a month, the peak trading day which typically accounts for 20 percent of weekly revenue. The impact on full- year profit will be about 100 million pounds, which will be weighted toward the second half, Tesco said today.
Asia, Europe
Trading profit in Asia, which also includes China, Thailand and Malaysia, fell 3.8 percent to 281 million pounds in the first half, while earnings in European countries including Poland, the Czech Republic and Hungary dropped 28 percent to 171 million pounds. About 17 percent of revenue in the latter region comes from non-food items such as electrical goods, which have been hit as consumers curb discretionary spending, Chief Financial Officer Laurie McIlwee said.
Losses at the U.S. Fresh & Easy chain narrowed by 1.4 percent to 74 million pounds in the first half.
“We need more from Fresh & Easy,” including getting and tracking more customers, Clarke said on the call. The business will maintain its push to get more existing stores into profitability before it opens any further outlets, he said.
Tesco maintained the first-half dividend at 4.63 pence, the first time this century that it hasn’t raised the payout.


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