Tesco under pressure to deliver

Tesco boss Philip Clarke will face pressure to deliver on his £1 billion turnaround plan today when annual results are expected to reveal a sales slowdown and the first fall in annual profits for 20 years.

Tesco under pressure to deliver

Tesco boss Philip Clarke will face pressure to deliver on his £1 billion (€1.16bn) turnaround plan today when annual results are expected to reveal a sales slowdown and the first fall in annual profits for 20 years.

The UK’s biggest supermarket reports back after a difficult few months following the horse meat scandal, with analysts concerned that Tesco’s recent UK sales rebound may be running out of steam.

Figures are set to show underlying group profits slumping by almost 11% to £3.5 billion as the group also counts the cost of pulling out of the United States.

It is expected to confirm a decision to quit the US, where its 199-store Fresh & Easy business has never made a profit, in a move that could cost it up to £1 billion in asset write-downs.

The results will mark the first drop in full-year group profits since the 1990s, although the UK arm has already been under pressure after trading profits fell 1% to £2.5 billion in the last financial year.

Tesco has been in recovery mode since falling market share and intense competition prompted the chain’s first profits warning in January 2012. That forced Mr Clarke, who started his career stacking shelves in Tesco, to unveil a £1 billion overhaul plan in April last year.

A year on from the launch of his fightback to revitalise trading in the UK, Mr Clarke will be looked to for his plans to step up recovery efforts.

There have been hopes that sales had turned the corner after a buoyant Christmas, when like-for-like sales rose 1.8%, but more recent trading is expected to show it failed to maintain the bounce back.

Analysts at Nomura are forecasting like-for-like sales in the group’s final quarter to the end of February to show a rise of just 0.1%, with Shore Capital experts also predicting growth up to 0.5% at best, although this would still mark an improvement on the 0.6% fall in the third quarter.

Tesco has been among those retailers suffering after some of its products labelled as beef were found to contain horse meat and recent market share figures showed it losing out to rivals such as Sainsbury’s and Waitrose.

Kantar Worldpanel figures for the 12 weeks to March 17 revealed Tesco’s market share dropped to 29.4% from 30.2% a year earlier.

The recent sales woes are expected to see UK annual trading profits slip 8% to £2.3 billion.

Mr Clarke has sought to raise the group’s game by improving the shopping trip for customers through brand relaunches, store makeovers and hiring more staff.

Tesco also last month bought the 47-store Giraffe child-friendly restaurant chain for £48.6 million in a move that will see it open the eateries alongside larger stores under plans to transform its stores into family-friendly retail destinations.

The deal follows recent similar investments in the Harris + Hoole coffee shop chain and Euphorium Bakery.

Analysts at Panmure Gordon said that while the 2012 results “will not look good”, Mr Clarke’s turnaround is starting to bear fruit.

“What is important is that Tesco UK – 60% of group profits – is on the road to recovery and management’s blueprint for the future has enough of the ’vision thing’ to suggest that it will emerge as a winner,” they said.

The focus will also be on its decision on the US business after it announced a review of Fresh & Easy in December.

Mr Clarke said he was not afraid to make “big decisions” by calling time on the venture, which was a victim of poor strategic decisions early on and bad timing after launching in 2007 amid a housing market slump in California and just before the financial crisis struck.

Analysts expect heavy write-downs if Tesco quits the US, with predictions ranging from £250 million to £1 billion. Options for the US business include a one-off sale or piecemeal disposal of assets.

Shore Capital analysts said: “After giving Fresh & Easy a fair shot in our view, we believe that Philip Clarke deserves credit for his decision to withdraw from the USA and subsequent focus upon making the most from a group that retains strong cash generative capabilities, a robust balance sheet and leading market positions in most of its trading territories.”

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