Belfast Telegraph

Tesco reveals slump in profits

Tesco's recovery plans will come under more scrutiny
Tesco's recovery plans will come under more scrutiny

Tesco's half-year profits tumbled by almost a quarter today after underlying sales declines in the UK and every one of its overseas markets.

Once the driving force behind the group, its European and Asian businesses were hit by steep profit falls, contributing to a 23.5% drop in pre-tax profits to £1.39 billion.

Tesco insisted its turnaround efforts were paying off with an improved performance in the UK, where trading profits rose 1.5% to £1.13 billion in the six months to August 24.

While UK like-for-like sales excluding fuel fell 0.5% overall in the first half, the group halted declines in the second quarter, with sales remaining flat against a 1% drop in the previous three months.

Shares slid more than 3% amid fears that Tesco is losing the battle to keep its international business on track, while rival Sainsbury's also heaped on more pressure as it reported a better-than-expected sales hike in its second quarter.

Sainsbury's posted a 2% rise in like-for-like sales excluding fuel as it continues to gain market share at the expense of its three main rivals.

Philip Clarke, chief executive of Tesco, said: "Despite continuing challenges, we have made further progress on our strategic priorities."

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"Our performance in the UK has strengthened through the half, particularly in our food business, as we have continued our work to Build a Better Tesco," he added.

With the impact of one-off costs and lower profits on property sales stripped out, underlying group pre-tax profits fell 8.4% to £1.47 billion on a constant currency basis.

Tesco has been retrenching from loss-making international businesses to focus recovery efforts on the UK and today confirmed a deal with China's largest retailer CR Vanguard to merge their operations in the country, creating a business with more than 3,100 stores and combined sales of close to £10 billion.

It brings to an end Tesco's go-it-alone strategy in one of the world's fastest growing retail markets, and comes after recent costly exits from the US and Japan.

John Ibbotson, director of the retail consultants Retail Vision, said Mr Clarke was fighting hard to keep the Tesco ship afloat.

"As soon as one leak is plugged, another opens up," he added.

Tesco suffered a 71% tumble in European trading profits to £55 million in its first half and admitted the hit was worse than expected after conditions deteriorated in countries such as Ireland, Turkey and Poland.

Profits also fell sharply across Asia, down 12.4% to £314 million, excluding China.

Not including China and its US chain Fresh & Easy, like-for-like sales fell in each of its 10 regions, with Turkey and the Czech Republic seeing the biggest falls - down 12.8% and 6.9% respectively.

Tesco admitted the overseas woes would offset some of the benefit of its UK profits improvement over the full year.

Mr Clarke said he remained committed to Europe, but stressed the region accounted for less than 15% of group sales.

Retail experts at Shore Capital Stockbrokers said the European results were "pretty awful".

Tesco's international operations have been hit hard by the eurozone crisis, while Sunday trading restrictions in Korea have knocked its Asian business.

But a 3.7% fall in sales throughout Asia also provided further signs of a wider slowdown in the region, following a warning earlier this week from consumer goods giant Unilever over worsening conditions in emerging markets.

Tesco has been forced to reverse much of former boss Sir Terry Leahy's ambitious international expansion strategy that saw billions of pounds spent on expanding its footprint.

Under Mr Clarke's leadership, Tesco is also scrapping more than 100 major UK store developments and focusing growth on convenience stores and its online offering, while also looking to transform stores into family-friendly retail destinations with the addition of the Giraffe restaurant chain alongside larger stores.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said there was scope for further growth at Tesco in the UK as its £1 billion overhaul gains traction.

"Tesco is spinning the strategic plates and is showing some early signs of success," he said.

Mr Clarke insisted the group was "feeling positive about the changes we've made".

It is relaunching its premium Finest range next week following a sponsorship deal secured with ITV's Downton Abbey, while its Hudl tablet hit store shelves last week with the aim of making the computers accessible to a wider market.