Tesco Prepares to Exit U.S. With Sale of Fresh & Easy

tesco earnings fresh easy
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By James Davey and Kate Holton

Britain's biggest retailer, Tesco, wrote down the value of its global operations by $3.5 billion and announced plans to exit the United States, as it sought to rebuild after a year in which profit fell for the first time in two decades.

The group, the world's third largest retailer after Walmart and Carrefour, said on Wednesday abandoning loss-making Fresh & Easy in the U.S. would mean restructuring and other one-off costs of 1 billion pounds ($1.5 billion).

Tesco also wrote down the value of its property in Britain by 804 million pounds, reflecting a decision not to develop more than 100 sites, and its businesses in Poland, the Czech Republic and Turkey by 495 million pounds, to account for a sharp slowdown in demand.

Though Chief Executive Philip Clarke hailed Tesco's fourth quarter performance in its home market as its best quarterly outcome in three years, it still represented a slowdown in growth since Christmas, despite a year of huge investment.

"I've been working for Tesco for nearly 40 years and I can tell you this -- it already looks, feels and acts like a different and a better business," Clarke told reporters.

"We've closed the gap in the [U.K.] market, at times we've outperformed it," he said.

Shares in Tesco, up 24 percent over the last three months, were down 3 percent at 1004 GMT, valuing the business at 30 billion pounds.

"Management cannot claim concrete evidence of a U.K. recovery with these numbers," said Panmure Gordon analyst Philip Dorgan.

"It will take time -- retail is detail -- but we believe that Tesco is on track and we expect recovery in the U.K. to slowly emerge in FY2014," he said, adding that Tesco could commence share buybacks in 2015.

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Tesco made a statutory pretax profit of 1.96 billion pounds in the year to Feb. 13, down 51.5 percent. It also reported an expected 14.5 percent fall in underlying full-year profit to 3.55 billion pounds, largely reflecting the cost of a 1 billion pounds turnaround plan for its home market, launched after a shock profit warning in January last year.

Earnings were also hit by the impact of the euro zone debt crisis on eastern European markets, restrictions on store opening times in South Korea, and the Fresh & Easy losses.

Fourth quarter sales at British stores open over a year, excluding fuel and VAT sales tax, grew 0.5 percent. Though at the top end of analyst forecasts it was worse than growth of 1.8 percent recorded in the six weeks to Jan. 5.

Tesco's fightback plan for Britain, where it makes over 60 percent of revenue and profit, has focused on more staff, refurbished stores, revamped food ranges and price initiatives -- all aimed at reversing years of underinvestment and halting a loss of share to rivals like J Sainsbury and Asda.

The group also said it had increased a provision to cover the possible miss-selling of insurance products at its Tesco Bank to 115 million pounds.

U.S. Retrenchment

Following the U.S. retrenchment and reassessment of its U.K. property plans, including a scaling back of sale-and-leasebacks, Tesco now expects to deliver mid single digit trading profit growth, a return on capital employed within a range of 12 to 15 percent and dividend growth broadly in line with underlying earnings.

Fresh & Easy, which trades from 199 stores and employs around 5,000, has absorbed more than 1 billion pounds of capital since its 2007 launch when Tesco was run by Clarke's predecessor Terry Leahy but has never turned a profit in a market where it competes with the likes of Trader Joe's and Walmart Stores Inc. (WMT).

"When I became CEO I really did give it all that we had but in the end I'm responsible to investors and I know I can deliver more to them by leaving that I can by staying," said Clarke.

He had put the venture, which contributes just 1 percent of group turnover, under review in December, saying an exit was likely.

Chief Financial Officer Laurie McIlwee said Tesco had received "a lot of interest" in Fresh & Easy, both for the whole business and parcels of stores.

"What we're most interested in is those buyers that are interested in buying the complete business," he said, noting that a clean sale would remove redundancy and onerous leasehold issues.

He said Tesco wouldn't conclude the process for at least another three months.