Overseas weakness gives Tesco headache

LONDON: Weak trading in Thailand and Poland took the shine off accelerating sales growth in Tesco Plc’s main UK business, with shares in Britain’s biggest retailer falling sharply after it missed first-half profit forecasts.

The company, being rebuilt by chief executive Dave Lewis following a 2014 accounting scandal, unsettled investors as problems abroad compounded fears that competition at home would intensify with the planned merger of its closest rivals.

The group, which stuck to its mediumterm targets, reported underlying operating profit of £933 million ($1.21 billion) in the six months to the end of August — up 24% on last year but short of the £978 million analysts had expected.

Profit fell 29.1% in Asia and by 3.3% in central Europe, partly offsetting growth of 47.6% in the UK and Ireland where it has benefited from its acquisition of wholesaler Booker Group Plc.

Shares in Tesco, up 12% this year prior to the update, fell 7.8% by 0945 GMT, on course for the biggest one-day drop since July 2016.

Lewis has been steering a recovery after an accounting scandal capped a dramatic downturn in trading. He has bought Booker to reach new markets such as restaurants and improved Tesco stores, staffing and lowered its prices.

Analysts said the results showed the company was heading in the right direction with the UK and Ireland, which contribute nearly three quarters of group profit, performing well.

But challenges lie ahead.

Tesco has a leading 27.4% share of Britain’s grocery market, according to industry data, although it could be overtaken by J Sainsbury Plc’s proposed £7.3 billion takeover of Walmart Inc’s Asda.

The tie-up between Tesco’s two nearest competitors, which the regulator is probing, is driven in part by the rise of discounters Aldi and Lidl, who are gaining ground on Britain’s big four grocers, as well as the growth of Amazon.com Inc.

“There are any number of incremental improvements within this statement. However, it is not all plain sailing,” said Richard Hunter, head of markets at Interactive Investor. “To maintain the market consensus of the shares as a strong buy, Tesco needs to keep a firm hand on the tiller.”

In Asia, second-quarter like-for-like sales fell 4.8%, which reflects Tesco’s decision to exit non-profitable cash and carry sales in Thailand. Underlying sales in the central Europe division fell 2.0%, reflecting weak sales in Poland.

Lewis said Tesco was committed to both Thailand and Poland.

“In Thailand we’re market leader, it’s still the most profitable part of the group and there’s still significant growth to be had,” he said.

Tesco was suffering in Poland because of restrictions on Sunday trading.

Lewis said the difficulties in Thailand and Poland did not imperil Tesco’s key margin target for the group to earn between 3.5 and four pence of operating profit for every pound customers spend by the end of its 2019-20 financial year.

Tesco held its own in a strong summer for Britain’s overall grocery industry which was boosted by record hot weather, a royal wedding and the soccer World Cup, delivering a 2.5% increase in second-quarter like-for-like sales — an eleventh straight quarter of growth.

After the Booker deal it has also made further restructuring moves in the market. It has agreed to form a global purchasing alliance with France’s Carrefour SA, while last month it launched Tesco’s new discount format Jack’s.

Lewis said the first two Jack’s stores were “trading really well”.