The headlines might not look great for Tesco after it revealed a drop in group trading profit of 13%, but analysts are pragmatic about the grocer’s performance.
“The withdrawal from the US will be disappointing for Tesco, but put in context the US market only accounted for just over 1% of its total sales in 2011/12. This move will give Tesco greater opportunity to focus on core areas of growth. This includes building its presence in fast growing grocery markets, such as China, and becoming a leader in online global retailing. Tesco announced on Wednesday that its online group sales exceeded over £3bn for the first time.” Gavin Rothwell, IGD Retail Analysis manager
“Yes this was the year that margins in the core business in the UK contracted. Yes, this was the year that the group’s international ‘jewel’, South Korea, hit a brick wall of sorts in the local regulator, so delivering a body blow to Asian returns, and yes, Tesco has reported a material 12.7% reduction in Group trading profits to £3,284m. However, these somewhat mellow headlines mask a year of considerable underlying progress for Mr. Clarke & Tesco to our minds. A lot of what we believe to be good and necessary work has been undertaken over the last 18 months, the fruits of which we expect to be harvested over the next five years by customers & shareholders. In some respects, Mr. Clarke has had to go backwards to move forwards, reflecting to our minds a more challenged business and more challenging market conditions than his predecessors faced. To his credit though, he has not shirked difficult decisions that we believe have been necessary to right the ‘good ship’ Tesco.” Clive Black, Shore Capital
“The big number in today’s results is profit, which is down by a whopping 51.5% on last year. In large part this is down to a series of one-off items, including a write down of the value of the UK property portfolio amounting to some £804m. This in itself is notable as it arises from a decision not to build new stores on more than 100 sites that the company owns and once intended to develop. In essence, this signals the beginning of the end of the grocery space race. On the home front, while Tesco’s results remain muted there is a sense that the business is now heading in the right direction as the “Build a Better Tesco” strategic plan starts to deliver. While for the full year, LFL sales remain in negative territory there is a clear momentum over the reporting period with a particularly strong performance in quarter 4 (LFLs up 0.5%), which encompasses the all-important festive trading period. Given the scale and maturity of Tesco’s business and the highly competitive state of the market this is a solid underlying performance that indicates that some of the initiatives are now having an impact on consumer behaviour.” Neil Saunders, Conlumino
“While a lot of the headlines will be grabbed by the news on Fresh & Easy and by the ostensibly negative trend in profitability, we would argue that the decline in earnings is primarily a reflection of welcome and overdue investment in the core UK supermarket estate. Tesco is painfully aware that its core offer in grocery has become off the pace, and improvements in store design, merchandising, private label and marketing tell us that Tesco is earnest in its desire to regain lost ground. What remains key is Tesco remaining steadfast in its commitment to invest in staff and hours in order to execute its recovery programme. Recent store visits and dialogue with store staff suggest that some momentum may have been lost in recent months.” Bryan Roberts, Kantar Retail
“Overall we think Tesco’s strategy of transforming itself into a multi-channel retailer is the right one, but the transition process away from being a hypermarket led retailer will be painful and probably less profitable, both in the UK and internationally. We reiterate our Sell.” Caroline Gulliver, Espirito Santo Investment Bank
“The decision to exit the US is not unexpected and the main focus of these results will therefore be upon the shift in strategy to focus on generating positive free cash flow. We think that this will be taken well by the market, especially as it signals the end of the space race in the UK. We believe that there are three prime drivers of shareholder value: (1) UK recovery; (2) Lower capital expenditure and higher returns; (3) The online opportunity.” Philip Dorgan, Capital MSL