Join our community of smart investors

Tesco's US hopes go stale

Supermarket giant announces plans to pull out of the US as it faces serious headwinds across the business
December 5, 2012

Tesco (TSCO) has announced plans to scrap its floundering Fresh & Easy business in the US on the back of consistently disappointing results. Chief executive Philip Clarke said the company was beginning a "strategic review" because the venture had not delivered acceptable shareholder returns in the right time frame. Third quarter like-for-like sales performance in the US dipped to 1.8 per cent.

IC TIP: Hold at 337.8p

Mr Clarke said he was considering "all options for the business" including a sale or partnership, but this is effectively the end of its US adventure. He added: "While the business has many positives, its journey to scale and acceptable returns will take too long relative to other opportunities." Fresh & Easy chief executive Tim Mason is to leave Tesco after 30 years service.

The announcement is the latest in a string of bad news for the supermarket giant, including a profit warning earlier this year, a £153m loss at Fresh & Easy in the last financial year and an exit from operations in Japan. Tesco is 11 months into a recovery plan put together by Mr Clarke.

The announcement overshadowed lacklustre quarterly results, which saw like-for-like group sales for the third quarter fall by 1.3 per cent, excluding petrol. Despite this, Tesco’s share price rallied in response to the US pull-out by 3.4 per cent to 337.8p. In the UK, like-for-like sales excluding petrol and VAT fell by 0.1 per cent. In Europe, sales excluding petrol fell by 3.6 per cent, reflecting declining economic growth in Eastern Europe, while in Asia like-for-like sales fell by 1.2 per cent.

Stripping out the drag of general merchandise, third quarter UK like-for-like sales in food were up 1.2 per cent, although inflation may have boosted these figures.

Seymour Pierce analyst Kate Calvert has Tesco on a reduce recommendation, saying there is a high risk things will get worse before they get better. With little visibility on when UK performance is likely to bottom out, she says there are better investment opportunities elsewhere in the non-food sector. Seymour Pierce forecasts 2013 profit before tax, exceptionals and property of £3.2bn, giving EPS of 30.7p.