Tesco Fails To Grow In Britain

Published in Investing on 18 April 2012

The giant retailer finds growth overseas, but stalls in the UK and loses money in the US.

There's an old phrase that goes along the lines of "Anything can happen, so anything does." Investors should remember this quote, if only to remind them that the future is not set. For example, I never thought I'd see the day when yearly UK sales fell at Tesco (LSE: TSCO), but they did just that last year.

This morning, Tesco released its results for the 52 weeks ending 25 February. Most companies would kill to report such powerful numbers, but they are something of a letdown for the supermarket juggernaut.

I'm going to review these results in 10 steps, before awarding Tesco an overall mark out of 10 and then weighing up its value characteristics. Here we go, starting with the top-level figure:

1. Revenue rises

In 2011/12, Tesco's overall sales grew by more than 7% to exceed £72 billion. However, more than £47 billion of this revenue came from the UK, which still accounts for almost two-thirds of total sales.

Sales growth was strongest in the US (up 27%), at Tesco Bank (+14%) and in Asia (+11%).

2. UK sales stagnate

While Tesco pushed ahead with strong growth overseas, its core UK operations stagnated. In fact, like-for-like sales (excluding VAT and petrol) were down 0.6% versus 2010/11. Thus, after 20 years of powerful progress, Tesco has (temporarily?) stalled in the UK.

3. Margins mixed

Retail is a cut-throat business, so one of the best ways to weed out the weak from the strong is to check trading margins. Thanks to heavy discounting in the UK, Tesco's margin slipped to 5.79%, down 0.35 of a percentage point. Elsewhere, margins leapt in Asia and the US, but dipped at Tesco Bank and in Europe.

4. UK store growth to slow

Tesco has been rapidly expanding its footprint overseas, adding 7.5 million square feet of space to its foreign estate. However, UK floor space grew by only 2.6 million square feet -- and the group intends to cut expansion growth for 2012/13 by 38%. Instead, Tesco will focus on its existing estate, with plans to refresh 430 stores in 12 months.

5. Profit creeps up

Group trading profit inched up 1.3% to £3.8 billion. This was driven by an 18% improvement in international profit to £1.1 billion, while UK profit slipped 1% to £2.5 billion.

6. Earnings increase

Diluted earnings per share (EPS) rose by a healthy 7% to 36.6p.

7. Dividend raised

Driven by higher EPS, Tesco lifted its full-year dividend by 2% to 14.76p per share. In total, Tesco paid out nearly £1.2 billion in cash dividends for 2011/12.

8. Cash flow up

Cash generated from operations climbed by 4% to over £4.4 billion. However, nearly £3.8 billion of this sum was reinvested back into the business.

9. Net debt steady

Tesco has a strong balance sheet, with net debt stable at £6.8 billion for the past two financial years. However, cash at hand declined slightly to £2.3 billion in 2011/12.

10.Pension deficit explodes

Long-established businesses often have large pension deficits, which investors should never ignore. Tesco's deficit jumped by over 40% to £1.4 billion, so it made a one-off cash contribution of £180 million after its financial year-end.

A tale of two companies

In my view, these results are something of a curate's egg -- good in parts.

On the positive side, Tesco is gaining momentum abroad, with strong sales growth in the US, Asia and Europe. Indeed, the FTSE 100 firm made healthy profits in four of its five regions, with only its US arm losing money. Even in America (where losses fell to £153 million), Tesco is heading in the right direction, with sales and margins rising steeply at Fresh & Easy.

Picking over these results, other positive signs emerge. For example, Tesco's market share has increased in 10 of its 13 markets -- with the UK being the glaring exception.

In effect, Tesco's is a 'tale of two companies'. On one hand, it has a fast-growing, profitable international arm with plenty of room to expand. On the other, its core UK estate has weakened as disposable incomes drop in one of the worst consumer environments since the 1930s.

Chief executive Philip Clarke admitted as much, saying, "Whilst our International business is delivering excellent growth... we fully recognise that we need to raise our game in the UK."

Worth the risk

Weighing up the 10 indicators listed above, I reckon that Tesco deserves a score of around seven out of ten. Not great, I'll grant you, but not bad either. On balance, I think that Tesco is still worth buying.

As I write, Tesco shares are trading up a fraction at 329p, valuing the UK's number-one retailer at nearly £27 billion. At this price, they trade on a forward price-earnings ratio of 9.5 times and offer a generous dividend yield of 4.8%, covered a chunky 2.2 times.

Having urged Fools to buy Tesco at 321.5p a month ago, I'm going to stick to my guns. While these results are a mixed bag, I suspect that they reflect short-term problems at Tesco. In the medium term, I imagine the reshuffled management team will inject new life into the UK portfolio (aided by £1 billion of spending in 2012/13), while enjoying glowing growth abroad!

Today at 4:30pm, we're hosting a live chat on Tesco's results and new UK strategy with our team of analysts at Share Advisor. Click here for full details.

> The Motley Fool owns shares in Tesco.

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SevenPillars 18 Apr 2012 , 12:34pm

I would disagree that the numbers reported today are a letdown for Tesco, simply because they are actually better than what the City expected 3 months ago! Much of the talk was about profit warnings and profits at the lower end of expectations, well they have beaten that. Even in the last few days most of the reports were expecting profits of around £3.7billion, again exceeded.

The media attention seems to have changed from profits warning to UK profits being down, although the overseas numbers clearly make up for it and are growing and excellent. Tesco is now a multi-national.

What we should really be discussing is the city overreaction 3 months ago when the share price was slaughtered 20% on the back of a profits warning that hasn't happened. Had Tesco announced then that profits would be around £3.8-9billion against consensus City forecasts of £3.88billion, would the share price have been slaughtered? The City was looking at £3.6-7billion profit after the Jan announcement, Tesco have outperformed despite its problems in the UK! What a farce.

squirrl 18 Apr 2012 , 1:20pm

In the past, I used Tesco for much of my shopping. When I discovered that more and more items could be obtained cheaper elsewhere, I began to use alternative supermarkets on a regular basis. Many of the people I know are doing the same as myself because Tesco appear to have lost the basic plot of "stack it high, sell it cheap". The result is that my local Tesco is now much emptier and my local Aldi is much fuller.

apprenticeDRL 18 Apr 2012 , 1:32pm

Seven Pillers - Personally I was happy with the share crash as it gave me the opportunity to purchase what I think is a good company at a good price. I still think they are undervalued.

Being patriotic I would also rather spend my money with a British company buying mainly British produced produce than a German company - Probably contentious but I think one way out of the mess we are in is to buy more UK produced goods.

BigJC1 18 Apr 2012 , 1:38pm

A World leading UK business which is growing rapidly on a global basis with market share growing in 70% of its markets, sales up, profits up, EPS up, dividend up. A tiny 0.6% fall in UK sales during some of the most difficult consumer conditions ever seen but a 27% increase in the US market..

It has to be a success story, yet the share price falls like a stone. That's why I never have and never will invest in any UK funds, their fund managers are simply clueless. When Tesco is number one in the USA, Asia, Europe, etc they will get back in, buying high and selling low but still raking off their 1% commission whilst UK pension funds show a sub 5% return. Shame full.

kiffberet 18 Apr 2012 , 1:40pm

Im kind of glad that Tesco are slowing their store expansion. Where I live in Norwich, there seems to be a new store popping up every few months. At the last count there are now 11 tesco (2 superstores, a Metro and 8 Expresses). Norwich isn't a big city, and that's just the stores I know about.
Apart from people getting sick of the sight of a Tesco on every corner, those small Express stores surely can't be a profitable as the bigger stores. I don't have any figures, but to me this massive increase in small stores explains the decreasing margins and will eventually impact their ability to compete with the likes if asda, sainsbury's and others...

I own the shares, so that worries me a bit.

4spiel 18 Apr 2012 , 2:50pm

Tesco should not waste money on gimmick improvements. People go there looking for good quality food at best prices. Increasingly the quality is as good elsewhere and sometimes better whilst Tesco screw up the price. selling rubbish clothes -why not leave it to George. and get better guarantees on electrical stuff and better after sales service.

dukindiva 18 Apr 2012 , 3:33pm

Yes Tesco is now a multinational, not before time!

The UK consumer has less money in their pockets since a long while and I would expect Aldi, Lidl & Netto to gain share at times like this.

Sooner rather than later, the 'big 4' will use their buying power to address this.

I think Tesco shares are still cheap.

Noige 18 Apr 2012 , 4:03pm

I'm in Ireland (Southern), where Tesco are also the largest player. I had considered buying Tesco shares, even before the recent drop, but my own experience has put me off that and there is definitely a reason they've been going down.

I'm a value shopper, in that I'm not interested in big brands (unless they're much, much better), but Tesco seem to have been substantially reducing the number of own-brand items, many of which I liked and bought regularly. I'm not talking about the very basic Value range or their Finest range, but the ordinary Tesco label range in between. Mouthwash, various flavours of ready meal, spicy mexican beans, stone-baked pizzas - all gone. I'm just not going to pay ridiculous prices for big brands - I don't care if they are a few pence cheaper than in other supermarkets (which they're usually not anyway) - so now I do most of my shopping in Aldi and Lidl, and the occasional item in Tesco, whereas it used to be the other way around.

Meanwhile, they seem to have increased the diversity and number of lines of other produce (clothes, printer ink, pots, bulbs, you name it) that they're carrying, in what is quite a small supermarket, so there's not much of anything worth buying anyway. This on top of their regular supply problems (when they run out of some items, sometimes it can be months before they return).

So it comes as no surprise that Tesco UK (and Ireland - they count Ireland as part of that and don't seperate out the results) are on a downward slope, if the same kind of thing is going on in the UK.

jaizan 18 Apr 2012 , 7:22pm

Ultimately, there's going to be a limit to the scope for Tesco growth in the UK.
If the consumer is reigning in spending, they can only do that by taking a bigger share of the market.
For value, Lidl & Aldi do a much better job.
For quality at a moderate price, Sainsburys have the lead.
The discount clothing & footwear range seems to have deteriorated in the last couple of years. Cheap footwear is fine, but not if it entails looking like some refugee.
As for the electricals, surely Tesco must be feeling the on line competition?
Then what I do want is often out of stock & finally, the till service is persistently & painfully slow.
No growth here.

Benatar 18 Apr 2012 , 9:08pm

UK like for like sales and UK market share are what every one seems to focus on. These may be important, but the most important figures from an investor's point of view are the group totals.

Once any outfit gets to be top dog in their field, they simply can not keep on growing market share - Man Utd may win the Premier League every year, but they will not increase their points total every year. There is bound to be some erosion of market share at some point.

But if we are focussing on UK like for likes, the 6 week period over Christams saw UK like for likes fall by 1.3%, but the full Q4 UK like for likes were up 1.2%. This means the last 7 weeks of Tesco's year saw them making some serious progress.

GrangeInvestor 18 Apr 2012 , 9:15pm

I really do believe that e-commerce still has a long way to go; and for me the most impressive news is Tesco's fantastic online performance.

gillerz960 19 Apr 2012 , 11:10am

I live just round the corner from the infamous Tesco in Stokes Croft. Does anyone know if there is a way to get store by store information? I struggle to see how this store can be doing well financially, and it has had a negative impact on Tesco's image as well, although not too seriously nationally. The store rarely has more than a handful of people in and seems to be overstaffed, often including one or two bouncers on the door.

ANuvver 19 Apr 2012 , 4:11pm

Wasn't impressed by Clarke on the Today programme. If he'd wittered out that loathsome buzzphrase "retail is detail" one more time...

Interesting observation, though not from him, about Tesco Online still being more of a warehouse than a shopping experience.

jackdaww 20 Apr 2012 , 9:05am


clarke less than impressive.

how long will he last?

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