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Tesco Profit Falls on U.K. Investments, Slump in Europe

Tesco

Tesco Plc, the U.K.’s largest retailer, said first-half earnings declined as European shoppers shunned its supermarkets and the company paid to win back customers in the U.K.

So-called trading profit fell 7.6 percent to 1.59 billion pounds ($2.6 billion), Cheshunt, England-based Tesco said today. The median estimate of 13 analysts compiled by Bloomberg was 1.62 billion pounds. Operating profit in Europe slid 68 percent.

While U.K. sales have stagnated amid competition from discounters and rivals such as Waitrose and J Sainsbury Plc, revenue is declining in all Tesco’s international markets. In particular, shoppers in Turkey and Ireland were more prudent than some analysts had expected during the first half.

The profit decline in Europe “was far more severe than the market’s cautious expectations,” analysts at Barclays wrote in a note. In the U.K., “although the recovery has much further to go, there are reasons for cautious optimism.”

The shares fell 3.4 percent to 347 pence at 8:23 a.m. in London trading. Sainsbury fell 1.1 percent to 386.1 pence after today reporting 2 percent growth in second-quarter same-store sales, excluding gasoline, an outcome that matched 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.

Stagnant U.K.

“Despite continuing challenges, we have made further progress on our strategic priorities,” Chief Executive Officer Phil Clarke said in the statement. “We are strengthening our U.K. business, working to establish multichannel leadership and pursuing disciplined international growth.”

In the U.K., which accounts for two-thirds of profit, sales at stores open at least a year, excluding petrol and value-added taxes, were unchanged in the second quarter, matching analyst estimates for that measure. That was an improvement from the 1 percent decline in the first quarter.

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.

Market Share

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.

Sainsbury, the single grocer of the four largest to gain market share in that period, said today it was starting to see “encouraging signs in key economic indicators.”

Outside of the U.K., Tesco has sold off businesses including Fresh & Easy in the U.S. and today said it would pay $558 million to fold its Chinese hypermarkets into a joint venture with China Resources Enterprise Ltd.

Like-for-like sales fell 5 percent in Europe, as shoppers in Ireland defected to cheaper offerings and Turkish customers shunned Tesco’s large store formats.

Tesco’s performance abroad is “raising questions whether management will move to exit other markets” such as Poland and Turkey, John Kershaw, an analyst at Exane BNP Paribas, said in a note previewing today’s results.

(Source: Bloomberg)