Connect to share and comment

Tesco profit fall to reflect cost of fightback

PlacardEnlarge
(Globalpost/GlobalPost)

By James Davey

LONDON (Reuters) - Tesco <TSCO.L>, Britain's biggest retailer, is expected to report its first fall in underlying annual profit in two decades, reflecting the cost of a turnaround plan launched after last year's shock profit warning.

The group, the world's third largest retailer after Wal-Mart <WMT.N> and Carrefour <CARR.PA>, was one of Britain's most consistent companies in terms of earnings growth until it issued the profit alert in January 2012.

Analysts' average forecast is for Tesco, which makes over 60 percent of group revenue and profit in its home market, to announce an underlying pretax profit on Wednesday of 3.50 billion pounds in the year to February 13, according to estimates gathered by Vuma Consensus and published on Tesco's website.

That would mark a fall of 10.7 percent from the 3.92 billion pounds it made in 2011-12.

Tesco's 1 billion pound fightback plan for Britain focussed on more staff, refurbished stores, revamped food ranges and price initiatives - all aimed at reversing years of underinvestment and halting a loss of market share to rivals like J Sainsbury <SBRY.L> and Wal-Mart's <WMT.N> Asda.

Other factors weighing on earnings are the impact of the euro zone debt crisis on eastern European markets, regulatory issues in South Korea and losses at the Fresh & Easy business in the United States, which Tesco is expected to exit.

Tesco's statutory pretax profit fall will be greater than the underlying decline if it books a substantial asset write-off for quitting the California-based venture. Analysts expect a closure of Fresh & Easy, followed by a disposal of saleable assets.

A writedown of the last reported book value of the business would equate to just over 1 billion pounds. Analysts at Shore Capital estimate additional cash costs of about 250 million pounds, reflecting store leases and staff redundancy costs.

Tesco chief executive Philip Clarke said in January the firm was "back on form" in Britain with underlying sales growth of 1.8 percent for the six weeks to January 5, its highest rate in three years.

Analysts reckon underlying sales growth has slowed since Christmas. They forecast like-for-like sales growth of zero to 0.5 percent for the entire fourth quarter, with trading possibly hit by a Europe-wide scandal over the discovery of traces of horsemeat in beef products.

Tesco was one of many companies forced to withdraw some goods and apologise to customers.

On the other hand, the analysts point out that grocers issued fewer discount coupons in January and February this year than at the start of 2012, making comparisons harder.

With the turnaround plan now one year old, Clarke will update on progress and future plans.

"UK recovery is emerging only slowly and needs to be more evident before management can push the button on higher ROCE (return on capital employed) targets and cash returns," said Panmure Gordon analyst Philip Dorgan.

Tesco is forecast to pay a 2012-13 dividend of 14.68 pence, slightly down from 14.76 pence in 2011-12.

(Reporting by James Davey, Editing by Mark Trevelyan)

http://www.globalpost.com/dispatch/news/thomson-reuters/130416/tesco-profit-fall-reflect-cost-fightback