Thursday April 18, 2013

Tesco quits US

Britain’s biggest retailer also takes US$3.5bil global writedown

LONDON: Britain's biggest retailer, Tesco, wrote down the value of its global operations by US$3.5bil and announced plans to exit the United States, as it sought to rebuild after a year in which profit fell for the first time in two decades.

The group, the world's third largest retailer after WalMart and Carrefour, said abandoning loss-making Fresh & Easy in the United States would mean restructuring and other one-off costs of £1bil (US$1.5bil).

Tesco also wrote down the value of its property in Britain by £804mil, reflecting a decision not to develop more than 100 sites, and its businesses in Poland, the Czech Republic and Turkey by £495mil, to account for a sharp slowdown in demand.

Though chief executive Philip Clarke hailed Tesco's fourth quarter performance in its home market as its best quarterly outcome in three years, it still represented a slowdown in growth since Christmas, despite a year of huge investment.

“I've been working for Tesco for nearly 40 years and I can tell you this it already looks, feels and acts like a different and a better business,” Clarke told reporters.

”We've closed the gap in the (UK) market, at times we've outperformed it,” he said.

Shares in Tesco, up 24% over the last three months, were down 3% at 1004 GMT, valuing the business at £30bil.

“Management cannot claim concrete evidence of a UK recovery with these numbers,” said Panmure Gordon analyst Philip Dorgan.

“It will take time retail is detail but we believe that Tesco is on track and we expect recovery in the UK to slowly emerge in FY2014,” he said, adding that Tesco could commence share buybacks in 2015.

Tesco made a statutory pretax profit of £1.96bil in the year to Feb 13, down 51.5%. It also reported an expected 14.5% fall in underlying fullyear profit to £3.55bil, largely reflecting the cost of a 1 bil pounds turnaround plan for its home market, launched after a shock profit warning in January last year.

Earnings were also hit by the impact of the euro zone debt crisis on eastern European markets, restrictions on store opening times in South Korea, and the Fresh & Easy losses. Fourth quarter sales at British stores open over a year, excluding fuel and VAT sales tax, grew 0.5%.

Though at the top end of analysts' forecasts it was worse than growth of 1.8% recorded in the six weeks to Jan 5. Tesco's fightback plan for Britain, where it makes over 60% of revenue and profit, has focused on more staff, refurbished stores, revamped food ranges and price initiatives all aimed at reversing years of underinvestment and halting a loss of share to rivals like J Sainsbury and Asda.

The group also said it had increased a provision to cover the possible missselling of insurance products at its Tesco Bank to £115mil.

Following the US retrenchment and reassessment of its UK property plans, including a scaling back of saleandleasebacks, Tesco now expects to deliver mid single digit trading profit growth, a return on capital employed within a range of 12% to 15% and dividend growth broadly in line with underlying earnings. Fresh & Easy, which trades from 199 stores and employs around 5,000, has absorbed over £1bil of capital since its 2007 launch when Tesco was run by Clarke's predecessor Terry Leahy but has never turned a profit in a market where it competes with the likes of Trader Joe's and WalMart.

“When I became CEO I really did give it all that we had but in the end I'm responsible to investors and I know I can deliver more to them by leaving that I can by staying,” said Clarke.

He had put the venture, which contributes just 1% of group turnover, under review in December, saying an exit was likely.

Chief financial officer Laurie McIlwee said Tesco had received “a lot of interest” in Fresh & Easy, both for the whole business and parcels of stores.

“What we're most interested in is those buyers that are interested in buying the complete business,” he said, noting that a clean sale would remove redundancy and onerous leasehold issues. He said Tesco would not conclude the process for at least another three months. The group is paying a maintained dividend of 14.76 pence. - Reuters

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