Tesco Performs Well in UK, but Fresh & Easy Struggles in US

UK sales increased by 9.5% to £41.5bn (last year £37.9bn), including like-for-like growth of 4.3%, 2.7% growth from net new stores, a contribution of 2.1% from the 53rd week and a first-time contribution from the consolidation of TPF.

22/04/09 Leading UK retailer Tesco has reported a solid start to new financial year with 12.0% (ex-petrol) growth in Group sales, including increase in UK like-for-like sales of 3.4% in first six weeks (4.4% on a VAT-adjusted basis). The retailer reported a 15.1% increase in Group sales to £59.4bn with a 10.0% growth in underlying profit before tax, 12.4% rise in Group trading profit.

Terry Leahy, Chief Executive, commented: "At a time when customers everywhere are feeling the economic strain, we are responding to their changing needs in all our markets by lowering prices, introducing more affordable products and offering even sharper promotions. These actions, combined with our core strengths – in selling food and everyday essentials, owning our own property and having a broad business base – are helping us to cope well with the effects of the downturn. We are also pleased with the early performance of Tesco Personal Finance under our ownership and with the converted Homever stores in Korea."

"As a result, we have delivered a solid sales and profit performance, both in the UK and internationally, whilst continuing to invest in our long-term strategy for growth. We have made a good start to the new financial year and I am confident Tesco will continue to make good progress even in the current global economic environment."

Tesco said that in competitive market conditions, their core UK business delivered a year of solid progress. UK sales increased by 9.5% to £41.5bn (last year £37.9bn), including like-for-like growth of 4.3%, 2.7% growth from net new stores, a contribution of 2.1% from the 53rd week and a first-time contribution from the consolidation of TPF. Excluding petrol, like-for-like sales grew by 3.0%, with increases of 2.0% and 2.7% in the third and fourth quarters respectively. Adjusting for the reduction in VAT rates, which came into effect in early December, like-for-like growth excluding petrol was 3.7% in the fourth quarter.

The pattern of the retailer´s trading during the year was affected by a number of factors. Inflation reduced during the second half and the retailers rate of growth was also impacted by a sharp increase during the year in the level of downtrading by customers seeking to spend less on their weekly shop. Tesco supported both of these trends by cutting prices and introducing more affordable products – including their successful new 'Discounter' ranges. A combination of recovering competitors and more subdued customer demand in some non-food product categories continued to hold back sales progress in the second half, although non-food sales growth remained positive in a subdued market and broadly stable in like-for-like terms.

Increased productivity and good expense control enabled the retailer to maintain solid margins and deliver good profit growth despite these challenges, whilst also absorbing initial trading losses totalling around £22m on Tesco Direct. After these costs, UK trading profit rose 12.7% to £2,381m (last year £2,112m), with trading margins at 6.2%, including TPF, slightly up on last year. On a 52-week comparable basis, UK trading profit rose 10.7%.

Tesco´s expansion plans in the US has gone less well with its Fresh & Easy stores reporting higher than expected losses of £142m, principally as a result of the adverse movement in the Dollar. This is more than double the previous year’s loss of £62 million and more than the £100 million loss it had predicted. Tesco said that it was reining back on the growth of the chain, with just under 200 stores now expected to be open by March 2010, compared with the 400 it had planned.

"Given the scale of the economic downturn, particularly in Las Vegas, Phoenix and the Inland Empire region of California, we are also seeing increased demand from customers looking to make stretched household budgets go further – through more affordable products, larger pack sizes and additional range in some categories, such as grocery and frozen food. We are looking to meet these needs by making further changes to the stores."

"As previously announced, we are taking a more cautious approach to expansion by maintaining instead of accelerating the rate of new store opening, until economic conditions start to improve in the Western states in which we operate. We opened 62 new stores in the year with 0.6m square feet of selling space and we expect to open a similar number during the current year, mostly in the second half," the retailer reported.