… but reinvestment and international challenges hurt profits.
Tesco (LSE: TSCO) reported positive results from its £1 billion UK revitalisation plans, but price competition in the domestic market and economic and regulatory issues abroad sent trading profits down 10.5%.
As Tesco works to rehabilitate its image here in the UK, the early signs appear positive. With 8,000 new uniforms walking the aisles and 230 stores receiving facelifts, management reported like-for-like sales growth (LFL -- sales growth at stores open at least a year) of 0.1% in the quarter. That number may not look all that impressive compared to Sainsbury's (LSE: SBRY) reported 1.9% LFL growth, but it ends a year and a half stretch of negative LFL sales and is a significant improvement from the negative 1.5% reported last quarter.
Of course, new paint and new employees cost money and a major part of winning back UK shoppers is slashing prices, so a 2% rise in UK sales (including sales from new stores) resulted in a 12.4% drop in trading profit as was broadly expected.
There was little help on the international front as European shoppers remained under the cosh, new regulations limiting operating hours in Korea -- Tesco's largest market after the UK -- resulted in a LFL sales drop of 6.6%, and profitability in China and the US remained elusive.
Not all was bad news, however, as management's shift towards online sales and convenience stores and away from massive hypermarkets saved £500 million in capital expenditure and the sale of some property in Korea and Thailand helped reduce net debt from £7.6 billion to £7.2 billion.
The shares' recent recovery has them trading on a forward multiple of 10 times earnings, which isn't overly demanding. However, Tesco's turnaround in the UK has a long way to go and there are few signs that things will get easier in Tesco's other markets any time soon.
However, the new focus on cash flow means the Board was comfortable enough even with the drop in profitability to maintain the dividend at 4.63p. This provides patient investors with an attractive yield of 4.4% to wait for things to turn around. However, a ship the size of Tesco won't turn overnight, and I think any expectations of a rapid rise in the share price would be misplaced.
Of course, patient, income-based investing has helped ace stock-picker Neil Woodford deliver an impressive 347% total return -- and thrashed the wider market -- during the 15 years to 31 December 2011.
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> Nate and The Motley Fool own shares of Tesco.