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.