UK retailer Tesco reports first profit decline in almost two decades

TESCO, the UK’s largest retailer, yesterday reported the first profit drop in almost two decades after increasing investment to halt declining supermarket sales.

CEO Philip Clarke said yesterday trends towards online shopping and competition from smaller, convenience retail shops continued to affect Tesco, but a plan was in place to reverse lost revenue.

So-called trading profit fell 11% to £1.59bn in the first half of the financial year, also hurt by reduced earnings in South Korea and central Europe, Cheshunt, England-based Tesco said yesterday.

Mr Clarke said it was too early to call a turnaround after UK sameshop sales snapped a run of six consecutive quarterly declines in the second quarter.

The 0.1% sales increase trailed a 1.9% gain reported yesterday by competitor J Sainsbury. Mr Clarke has pledged to invest £1bn in new products, additional staffing and Tesco’s 2,900 UK outlets as he seeks to boost a leading market position that fell to a seven-year low this year.

“There is little in these results to give investors confidence Tesco will return to being a double-digit growth story in the near term,” Espirito Santo analyst Caroline Gulliver said. Tesco fell as much as 2.1% in London trading and was down 1.3% at 332.5p before the close. The shares have fallen 18% this year, while Sainsbury has gained 15%. Sainsbury rose 0.6% to 349p yesterday.

Tesco said changes being made to its domestic business were being favourably received by customers. More than 8,000 staff have been added, while about 230 shops have undergone modernisation work, the company said.

“The changes are coming through at a pace,” Mr Clarke said. “Customers are starting to tell us they like what they’re seeing. I wouldn’t be saying we’ve turned the corner, we’re on the road.”

The 0.1% increase in UK sameshop sales, reported on a basis that excludes fuel and value-added tax, was the first since the third quarter of the 2011 financial year.

The second-quarter performance “tells us that its underperformance in the UK may well have bottomed out”, Kantar Retail analyst Bryan Roberts said in London.

The external environment “con- tinues to present challenges all over the world”, Tesco’s Mr Clarke said. The retailer gets about a third of sales and earnings from outside of the UK.

In South Korea, Tesco’s secondlargest market after Britain, profit was hurt by restrictions to store opening hours. All of its shops, including convenience outlets, are now closed for two Sundays a month, the peak trading day which typically accounts for 20% of weekly revenue. The impact on full-year profit will be about £100m, which will be weighted towards the second half, Tesco said yesterday.

Trading profit in Asia, which also includes China, Thailand and Malaysia, fell 3.8% to £281m in the first half, while earnings in European countries including Poland, the Czech Republic and Hungary dropped 28% to £171m.

About 17% of revenue in the latter region comes from non-food items such as electrical goods, which have been hit as consumers curb discretionary spending, chief financial officer Laurie McIlwee said.

Losses at the US Fresh & Easy chain narrowed by 1.4% to £74m in the first half. Tesco shares fell 1.3% to 332.3p yesterday. Bloomberg