Tesco today reported a 7.6% drop in group trading profits in its first half as problems in its overseas arm. Retail Week rounds up the City’s reaction.

“Philip Clarke, Tesco’s chief executive, must be thinking about entering the Rio Olympics weight-lifting competition given the amount of ‘heavy lifting’ that he has had to engage in over the last three years. Indeed, with Tesco’s interim results today, it is clear that more training is going to be required before the corporate bar feels less heavy.

“However, to be clear, we believe that he has undertaken a lot of necessary, hard and good work to date, which positions Tesco better for the future, and most critically in our view, creates the position whereby it becomes a cash generative and more shareholder friendly entity. That said the most notable feature in this update is that the performance in Europe was pretty awful.” – Clive Black, Shore Capital

“We think that consensus forecasts for February 2014 group trading profit will likely fall by around 2% to 4% before the impact of China deconsolidation, with some offset to European downgrades from a solid UK sales and margin performance, and will likely be flat to down around 2% including the benefit of the deconsolidation of China.” – James Collins, Deutsche Bank

“The company is adopting a cautious outlook for the second half: ‘challenging economic condition overseas has impacted profitability in the first half and will offset some of the UK improvement in the full year’. Although the UK performance can be seen as a relief, we believe the miss in trading profit and a cautious outlook for the full year may drive consensus down.” – Sherri Malek, Merrill Lynch

“The UK trading performance in second quarter was in-line at -0.0% excluding VAT, excluding petrol, versus first quarter -1% and brings into question exactly how Tesco has managed to maintain UK trading margins given costs are rising around +2.8% and by implication sales volumes are negative. The profit outlook for the second half/FY14E could very much depend on a positive UK like-for-like performance, higher gross margin and a credible explanation of how the multitude of investments in UK stores will improve the brand’s overall performance. A weak European margin is despite a total reduction in new store space costs.” – Mike Dennis, Cantor

“First half EBIT of £1.59bn was around 2% below consensus, but this is complicated by unexpected deconsolidation of China. Since China was lossmaking, this means that the miss was perhaps closer to 3% on a properly comparable basis. This was driven entirely by Europe, which saw EBIT of £55m – down by almost 68%.” – James Anstead, Barclays

“Just as there is a sense that Tesco is putting its UK house in order, the international picture looks increasingly worrying. European results were weak, with like-for-likes down by 5%. Some of this continues to be driven by negative economic headwinds affecting Central and Eastern Europe, but part of it is also linked to a structural shift as consumers in some markets switch away from larger store formats leaving Tesco, and other players, exposed. The picture in Asia is little better with trading in Korea impacted by regulatory restrictions and the Thai economy dipping into recession.

“Given the poor international outlook it is sensible that Tesco has switched its emphasis away from aggressive expansion and is diverting capital expenditure into improving existing operations and stabilising its core business. Over the medium term this will pay dividends and, we believe, will translate into genuine and sustainable sales growth.” – Neil Saunders, Conlumino

“As expected, Tesco reported a drop in UK like-for-like sales driven by subdued general merchandise sales – which are continuing to suffer - albeit like-for-like sales showed improvement in the second quarter.

“Nevertheless, food sales held up fuelled by warm weather in July/August alongside a new food-focused ‘Love Every Mouthful’ marketing campaign which launched during the half. We expect to see further positive news on food sales in the months ahead as improvements to product ranges come through.” – David Gray, Planet Retail