After Asda’s announcements last week, the UK retail spotlight swings to arch-rival Tesco, which is set to publish its full-year results tomorrow (20 April).
It has been a fascinating 12 months at the UK’s largest retailer. Tesco has seen off the late 2008 challenge from hard discounters Aldi and Lidi, which are both losing share in the UK, but the company still faces stiff competition from Asda, Morrisons and Sainsbury’s – even if the former two have seen and will see recent changes at the top of their businesses.
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Tesco looks set to publish rising domestic sales thanks in part to its investment in its Clubcard loyalty scheme, although industry watchers also predict that profits improved last year.
Christopher Hogbin, retail analyst at Sanford Bernstein, has forecast a 12.5% rise in EBIT from Tesco’s UK business, with a “robust” margin of 6.2%.
Tesco is set to publish faster profit growth from its international business, thanks largely to its operations in Asia but also a recovery from its stores in Europe.
Hogbin predicts a 16% in trading profit from Tesco’s overseas operations, boosted by the weakness of sterling but also improved earnings from Homever, the retailer’s business in South Korea.
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By GlobalDataNevertheless, Tesco has challenges overseas. The recession has meant Europe has been a drag on Tesco’s international numbers, particularly as the retailer has stores in markets like Poland and Hungary and that the downturn hit Eastern Europe later. However, fledgling signs of recovery could mean that Tesco reports improving trends from that region.
Ireland remains a particular problem. The Irish economy has had a dismal couple of years. A recent report from PricewaterhouseCoopers says the economy will contract by 1.3% in 2010, following a fourth quarter in 2009 that saw a “substantial contraction”.
Irish retail sales dropped 14.1% in volume terms and 18% in value terms last year, according to the latest figures from Ireland’s Central Statistics Office. Food sales volumes fell by 3.7%, while the value of food sales slid by 9.5% amid price competition from the country’s supermarket chains.
According to Hogbin, Tesco’s like-for-like sales tumbled 18% in the first half of the retailer’s fiscal year and the analyst expects the retailer to comment specifically on its business on the other side of the Irish Sea.
Across the Atlantic, Tesco continues to open stores and invest in its Fresh & Easy business as the company looks to expand again after the recession put the brakes on its ambitions in the US. Commentators will be keen to find out how much progress Fresh & Easy has made towards the point where the business will break even.
Tesco’s international operations suggests the retailer is a decent long-term bet among the UK’s listed retailers. Handling a business that spans from California to China will present very different challenges but could also give Tesco the chance to generate long-term returns.
