Tesco confirms US exit as pre-tax profits fall 51.5%

<p>Tesco, the world’s third largest retailer, confirmed on Wednesday that it’s Fresh and Easy chain was exiting the US market after a strategic review and […]</p>

Tesco, the world’s third largest retailer, confirmed on Wednesday that it’s Fresh and Easy chain was exiting the US market after a strategic review and reported its first decline in profits for two decades.

Tesco saw pre-tax profits fall 51.5% to £1.96bn with full year underlying profits down 14.5%. Q4 sales rose 0.5% which marked a slowdown from the 1.8% sales growth seen in the six weeks over Christmas (the same 1.8% growth that Sainsbury’s challenged as disingenuous).

At the same time, Tesco wrote down the value of its UK properties by £804m as it indentified more than 100 sites which the company no longer plans to develop.

Shares opened 3% lower in trading as investors reacted the earnings report but the falls were not dramatic and reflected investors locking in some gains after Tesco’s shares price rallied 25% since October last year.

Taking out the trash

These numbers are effectively Tesco ‘taking out the trash’. They are cleaning their books after a year spent trying to refocus the business back to its core markets where it has lost market share to rivals after an effort to diversify its business through growth abroad. The write off in its loss making US business was widely expected and comes broadly in line with market consensus.

The disappointment however will be in the weaker sales growth for their fourth quarter and this will raise concerns that whilst the company’s turnaround plan had started to turn a corner, the depth of that turnaround remains somewhat shallow.

Q1 sales figures for the start of this year is now going to be crucial for Tesco in realigning the turnaround story that the company’s PR machine has exerted for the last six months. Indeed this story could be hurt somewhat by the impending results of rivals Sainsbury’s and Morrisons, who announce their respective updates to the market over the coming weeks. If Sainsbury’s see’s strong quarterly sales figures as a comparative to Tesco’s slowdown in sales, this would be extremely concerning for Tesco shareholders.

Sainsbury’s and Morrison’s report to the market on May 8 and 9 respectively.

For now however, I am not too sure there is a huge degree to read into today’s earnings from the company other than its turnaround business as usual. This is not a dramatically poor or superb set of numbers. It is broadly in line with the majority of expectations. There are some minor positives, such as the aggressive way the company has set about removing loss making or poor performing assets/areas from its books. The negative side is the slower sales growth but its extremely hard to judge them on one quarter’s performance that saw terrible weather in the UK likely impact sales. Further evidence is required.

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