Tesco heading for break-even in the US, Asia booming

5th Oct 2011 07:23

Tesco the British retail giant, has seen total sales grow 8.8% in the half year to the end of August.Group sales hit £35.52bn with revenue excluding VAT up 7.3% from last year at £31.812bn. At constant exchange rates, sales increased by 8.2% (including petrol) and 6.7% (excluding petrol).Underlying pre-tax profit hit £1.922bn after taking into account provisions for the alleged mis-selling of payment protection insurance and a sales tax increase faced by its Hungarian stores. Seymour Pierce had forecast an underlying profit before tax of £1.73bn.Of all its major markets the UK, where Tesco makes around two thirds of its money, had the most difficult period with sales at £23.429bn, up 7.1%, and trading profit up 4.5% at £1.273bn, giving a trading margin of 6.01%, up seven basis points. The like for like sales figure for the UK, excluding petrol sales was actually down 0.6%.Tesco said higher than normal petrol prices had reduced customers' discretionary spend. The firm says it has acted "decisively" to reflect customers needs: "Specifically, we are investing over £500m in reducing more than 3,000 prices, including on 1,000 Tesco brand products."These price cuts amount to a price war against its UK rivals which Tesco says: "These moves represent the most significant changes to our pricing and promotions strategy for many years."Many investors will naturally look at the UK performance but for Tesco's board its performance in markets it does not dominate is of huge significance because foreign markets will be where the majority of its growth comes.With that in mind sales in Asia are up 11.9% at £5.6bn with profits up 18.7% at £292m.Sales in Europe grew 7.8% with profits at £237m up 11.8%.In the US, where Tesco has a relatively small presence nut which is seen as a hugely important indicator of Tesco's retailing skill, sales rose 32% to £304m at its Fresh & Easy stores while losses were reduced to £73m, an improvement of 23.2%. Tesco says it is "on its way" to breaking even by 2012/13. Until that point, however, investors will be watching the US numbers like hawks. Commenting on the results Tesco's chief executive Philip Clarke said:"I am pleased that excellent growth in Europe and Asia, as well as an encouraging performance in the United States, have supported further progress in the first half, despite the challenges of subdued demand in the UK, particularly in non-food categories. We are taking decisive action in key areas to strengthen our performance going forward: First, we are making substantial changes to our core UK business to sharpen execution and competitiveness for customers.Second, we have decided to slow the final stage of Tesco Bank systems migration to ensure it is as smooth as possible for customers.Third, the implementation of our plan to break-even in the US in 2012/13 is showing promising early results.Fourth, in line with our targets to improve investment returns, we are exiting Japan, having decided we cannot build a sufficiently scalable business there."The decision on Japan was previously announced while in this management statement, the delayed migration to new systems at Tesco bank is predicted to cost around £40m."We are at this stage broadly comfortable with current market consensus forecasts for 2011/12, adjusting for the effects of the additional Bank PPI [payment protection insurance] provision and changes to migration timing announced today," Clarke said. The interim dividend has been hiked 5.9% to 4.63p.BS