Tesco's UK progress has slowed slightly. But it's an international story now and that part of the business is booming. What's more, the shares are cheaper than they've been for some time.
A lot of the stories about Tesco's
(LSE: TSCO)
trading statement today have focused on its slowing progress in the UK. That's perhaps not surprising given our current obsession with what direction our economy is heading. But the real story at the supermarket is international expansion. By the end of this year, two thirds of Tesco's total floor space -- almost 60 million square feet -- will be located abroad.
The international growth story
Tesco's international focus is nothing new of course. It operates in 12 other countries, having started with Hungary as long ago as 1995. By 1998, the group had ventured into another five territories. In 2003, Japan was the first ‘major' economy to be targeted, followed by China a year later and the US under the ‘Fresh & Easy' moniker during 2007.
Tesco's approach of adapting its business to meet local demand and starting with gentle steps has served it well. The rate of international expansion is now increasing with new floor space of nearly 10 million sq ft this year, up almost 60% on last year's total. And a further 3 million sq ft will be added through last month's £1bn acquisition of 36 hypermarkets in South Korea. A paltry 2.5 million sq ft of new floor space is due to be added in the UK.
In the first quarter of this year, international sales growth at Tesco was 27%, dwarfing the 9% produced by the UK, although the crappy performance of the pound helped the comparatives substantially. All this expansion is expensive of course and most of it comes from the cash thrown off by the UK business. Tesco has debts of more than £6bn, however the average maturity is almost twenty years and over two thirds is on a fixed rate.
For the moment, the UK still produces the majority of Tesco's earnings. Indeed domestic profits were almost three times those of the International operations last year. This highlights the opportunity Tesco has, though. Annual sales per sq ft of £1,300 in the UK is over four times that of its international division. The gap will undoubtedly narrow somewhat in future.
Closer to home
To be frank, the UK side of the business is still doing pretty well. Like-for-like growth excluding petrol slowed from 4% in the first few weeks of the financial year to 3.5% for the quarter as a whole. Most of this was due to slower growth in non-food, where our expenditure is more discretionary, but Tesco was still able to grow its market share.
Every new direction Tesco has taken in the UK seems to have been successful. It's cracked the online grocery market and done well with clothing, mobiles and personal finance. In fact, the personal finance business has shown a low and falling level of bad debts, suggesting Tesco is probably better at running a financial services outfit than most UK banks!
All this has helped Tesco become one of the star performers in the FTSE 100 over the last decade, seeing its share price double while the broader UK market has remained more or less flat. The shares dipped down below the £4 mark this morning and are starting to look tempting again.
The earnings and dividend per share forecasts for this year are 28.3p and 12.2p respectively. This gives a forward price to earnings ratio of just under 14 and a dividend yield of just above 3%. This is the cheapest rating Tesco has been for a few years now. So if you're looking for a blue-chip stock to tuck away for a decade or two, Tesco should certainly be near the top of your shopping list.
