Tesco, the UK’s largest grocer, published its annual results today (19 April), the first such announcement presided over by new CEO Philip Clarke, who took charge in March. Shares in Tesco were down at lunchtime in the UK; what do City analysts make of the numbers and Clarke’s comments about the retailer’s prospects?
“At first glance the underlying pre-tax profit of GBP3.81bn (US$6.21bn), up 12.3%, looks good but remember that includes property disposal profits of GBP427m – which were ahead of the new annual target of GBP250m-350m of property profits. Ex-property the pre-tax profit … looks a tad below par, even though forecasts have been drifting down in recent weeks. The Tesco Asia profit is obviously strong, but Tesco UK trading profits are only up 4% (up 6% adjusting for sale and leasebacks) and the most striking admission in the statement is that Tesco think that’s not good enough. The other highlight is the new business in the US: the loss here last year was an alarming GBP186m, but Tesco are still promising to get this to break-even by the end of next year, which would be a remarkable turnaround, if successful” – Nick Bubb, Arden Partners.
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“The issue is that very little incremental profit has come from ‘Britain’ and the core operations and it is exactly here that Phil Clarke must focus with Richard Brasher to ‘keep the UK strong and growing’. The fact is Tesco wants ‘Britain’s’ contribution to reduce as a percent of the group but due to the growth of international and not the shrinking of the UK. Operationally Tesco must have over bought for Christmas 2010 and suffered a considerable hit to gross margins through waste and mark-down, a situation that might not prove to be a one off. This has occurred despite Tesco’s best efforts on managing price and supplier terms which means 2011 could be even tougher in terms of the trade off between trading margin and sales growth” – Andy Smith, MF Global.
“Trading profit in UK was slightly below our expectations. However, adjusting for pressures from higher fuel prices and increased rents from the sale and leaseback program – we estimate that the underlying margin modestly improved – confounding many investors’ fears about the resilience of the UK margin. Margins in Asia and Europe expanded by 35bps and 30bps, respectively – a better performance than we had anticipated. We expect the largely in-line results will be overshadowed by comments from the new CEO, Philip Clarke. The initial details in this morning’s press release, in our view, are encouraging. The general tone displayed more balance and candour than we have previously seen, for example in describing UK performance” – Christopher Hogbin, Sanford Bernstein.
“Looking backwards at the numbers for 2010/11, we would characterise the results as being very slightly below expectations, driven principally by the UK and US – with strong performances from the International business. Tesco’s shares have performed relatively poorly this year, so far down circa 4%. This is partly because of the weak Christmas trading statement but also because of fears over a potential price war – over which we remain rather sceptical. This is a statement which will probably not persuade any of the bulls and bears to change sides – we choose to focus on the confident ROCE outlook, the strong results from International and the company’s apparent confidence on the US outlook – but the bears may point to UK profits that are a little below expectations and the continuing weak UK consumer” – Barclays Capital
“We regard trading profit growth – importantly adjusted for previous property transactions – of 6.4% as a reasonable result. Phil Clarke’s approach is based on a pure retail and customer focus with a willingness and drive to engage more with customers and stakeholders. This should be taken well as should Tesco talking about the underperforming areas as well as the outperforming areas. We should not forget that despite the challenging environment that Tesco has just reported another year of double-digit growth. Unlike some of our peers and concurring with Tesco’s views, it does not have any structural problems in the UK, it has a competitive offer and a strong range while it needs to improve on its customer communications as well as continuing to improve is range, innovation and merchandising” – Justin Scarborough, RBS.
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