Tesco quits U.S. and takes £2.3 billion global write down
LONDON (Reuters) - Britain's biggest retailer, Tesco, wrote down the value of its global operations by $3.5 billion (2.3 billion pounds) and announced plans to exit the United States, as it tries to rebuild after a year when profit fell for the first time in two decades.
The group - the world's third biggest retailer after Wal-Mart and Carrefour and one of Britain's most consistent performers until a profit warning in January 2012 - said on Wednesday that abandoning its loss-making U.S. venture Fresh & Easy would mean restructuring and other one-off costs of 1 billion pounds.
Tesco also wrote down the value of its UK property by 804 million pounds, reflecting a decision not to develop over 100 sites as more shoppers move to the Internet, and took a 495 million pound goodwill charge on its businesses in Poland, the Czech Republic and Turkey to account for a slowdown in demand.
Chief Executive Philip Clarke declined to put the blame for the write downs on his predecessor Terry Leahy, who took Tesco with great much fanfare into the U.S. market in 2007 and also bought a huge amount of British development land.
"All the write downs relate to strategic decisions that I've taken since being CEO and are logical extensions of those - calling an end of the (UK) space race, deciding to exit the U.S.," he told reporters. "My job's not to look back, my job is only to look forward."
Tom Edson, head of food stores at property consultant Jones Lang LaSalle, said Tesco had taken a lot of pain in one go with the property write down. Its size reflected the "double whammy" of lower prices since the financial crisis and the fact that sites are automatically worth less if they will no longer become food stores, he said.
Although Clarke hailed Tesco's fourth quarter performance in its home market as its best quarterly outcome in three years, it still represented a slowdown in growth since Christmas, despite a year of massive investment.
"I've been working for Tesco for nearly 40 years and I can tell you this: it already looks, feels and acts like a different and a better business," he said.
Shares in Tesco, which have risen 24 percent over the last three months, were down 2.9 percent at 1421 BST, valuing the business at 30 billion pounds.
"Management cannot claim concrete evidence of a UK recovery with these numbers," said Panmure Gordon analyst Philip Dorgan.
"It will take time - retail is detail - but we believe that Tesco is on track and we expect recovery in the UK to slowly emerge in FY2014," he said, adding that Tesco could commence share buybacks in 2015.
Tesco reported an underlying pretax profit of 3.55 billion pounds for the 2012-13 year, broadly in line with analysts' expectations but down 14.5 percent on 2011-12.
That reflected the 1 billion pound cost of a UK turnaround plan, restrictions on store opening times in South Korea, Fresh & Easy losses and fallout from the euro zone debt crisis on eastern European markets - which Clarke said created "the worst set of economic circumstances for consumers since the end of communism".
After taking account of the write downs and a provision of 115 million pounds to cover possible miss-selling of insurance products at Tesco Bank, the group's statutory pretax profit slumped 51.5 percent to 1.96 billion pounds.
Fourth quarter sales at its British stores which have been open for more than a year grew 0.5 percent, excluding fuel duty and value-added tax. Although at the top end of analysts' forecasts, this was less than growth of 1.8 percent recorded in the six weeks to January 5.
Analysts believe trading may have been hurt by the discovery across Europe of horsemeat in products labelled as beef. Tesco was one of many companies forced to withdraw some goods and apologise to customers.
Tesco's fight back plan for Britain, where it makes over 60 percent of revenue and profit, has focused on more staff, refurbished stores, revamped food ranges and price initiatives - all aimed at reversing years of underinvestment and halting a loss of share to rivals such as J Sainsbury and Asda.
Having bought UK restaurant chain Giraffe and stakes in Harris + Hoole coffee shops and Euphorium bakeries, a focus for 2013-14 will be making Tesco's larger stores compelling destinations for families, said Clarke.
Following the U.S. retrenchment and reassessment of its UK property plans, including a scaling back of sale-and-leasebacks, Tesco now expects trading profit growth in the mid single figures, a return on capital employed of 12 to 15 percent and dividend growth broadly in line with underlying earnings.
Fresh & Easy, which trades from 199 stores and employs around 5,000 people, has absorbed over 1 billion pounds of capital, but failed to turn a profit in a market where it competes with the likes of Trader Joe's and Wal-Mart.
"When I became CEO I really did give it all that we had but in the end I'm responsible to investors and I know I can deliver more to them by leaving that I can by staying," said Clarke.
He had put the venture, which contributes just 1 percent of group turnover, under review in December, saying an exit was likely.
Chief Financial Officer Laurie McIlwee said Tesco had received "a lot of interest" in Fresh & Easy, both for the whole business and parcels of stores. "What we're most interested in is those buyers that are interested in buying the complete business," he said, noting that a clean sale would remove redundancy and lease issues.
Tesco would not conclude the process for at least another three months, he added. The group is paying a maintained dividend of 14.76 pence.
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