Tesco revealed today it is to conduct a strategic review of its lossmaking US chain Fresh & Easy as its third quarter sales slowed in the US and the UK. The City remained cautious over the company’s prospects.
“The big news from Tesco comes in the form of a strategic review of its US operations. While only a review has been launched, Fresh & Easy’s fate appears to be sealed, with the departure of its chief executive and long-time Tesco figure Tim Mason. This decision should please shareholders, as the performance and profit potential of Fresh & Easy has been questioned for some time now.
“Tesco remains cautious about how it will perform in the final quarter of its financial year, and its trading over the Christmas period will be a barometer to gauge the impact of Philip Clarke’s investment plans. However the market will remain tough, with high levels of competition from its Big Four counterparts, as well as upmarket players such as Waitrose, and discounters Aldi and Lidl, as they all gear up for intensive seasonal trading.” - Andrew Stevens, Verdict
“We see this review as one of the most high profile and perhaps defining moments in Philip Clarke’s position as chief executive of the group, noting as we do that Fresh & Easy was not his baby. The move, however, follows on from a series of decisions that introduce more focus and capital discipline by Tesco, which if sustained and seen through will transform free cash flow generation and potentially lead to shareholder friendly outcomes. We back up this assertion by reference to Tesco’s exit from Japan and the dismantling of the prior management’s ambitious [strategy] for China.” – Clive Black, Shore Capital
“Tesco third quarter sales update was expected to be all about the outlook for a sustained recovery in the UK business, but it is overshadowed by the news that Tesco has launched a strategic review of its heavily loss-making Fresh & Easy operation in the US and that the US boss Tim Mason is to leave the group. This is after like-for-like sales growth in the US business slipped below 2% in the third quarter, which is unacceptable given the maturity curve that the business should be riding, and the old gibe that shopping at Fresh & Easy wasn’t very fresh and not very easy has come back to haunt Tesco. It will be costly to pull out, but the stockmarket has been urging chief executive Phil Clarke to make up his mind and he will probably get credit for that.” – Nick Bubb, independent analyst
“We remain fearful that non-food sales will continue to act as a drag on the business and that Tesco will not be able to drive sufficient sales uplifts (without the benefit of expensive promotional vouchers) to hold UK margins steady at 5.2% next year, as management has guided to.” – Caroline Gulliver, Espirito Santo
Tesco likely to exit US business as Tim Mason departs
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