Tesco Admits Defeat In US

Maynard Paton

By

Maynard Paton

Published in Company Comment on 5 December 2012

Tesco (LSE: TSCO) launches a strategic review of Fresh & Easy.

The shares of Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) rallied 13p, or 4%, to 340p in early London trade this morning after the retailer essentially admitted defeat with its Fresh & Easy chain.

The FTSE 100 (UKX) member said it was "now clear" that its US division "will not deliver acceptable shareholder returns on an appropriate timeframe in its current form".

Tesco claimed it had received a number of approaches from parties interested in either acquiring part or all of Fresh & Easy, or in becoming a partner in the subsidiary.

Philip Clarke, Tesco's chief executive, said this morning:

"Following a year in which my priority for Fresh & Easy was to improve its performance, I have now made a fully informed assessment of its longer term potential."

"Whilst the business has many positives, its journey to scale and acceptable returns will take too long relative to other opportunities. I have therefore decided to conduct a strategic review of Fresh & Easy, with all options under consideration."

Published during October, Tesco's half-year figures had showed the Fresh & Easy chain racking up a £74m loss from sales of £365m. Preceding annual results had revealed a £153m loss for 2012, a £186m loss for 2011, a £165m loss for 2010 and a £142m loss for 2009. The first Fresh & Easy store opened during November 2007.

Today's Fresh & Easy statement was announced alongside a third-quarter trading update.

Tesco said total sales improved by 1% during the quarter, with UK sales up 2% and overseas sales down 0.2%. Strong top-line performances within Tesco's Asian operations were offset by adverse currency movements within the group's European outlets.

Boss Philip Clarke remarked:

"I am pleased with the performance of our food business in the UK… Our general merchandise performance overall in the UK was not good enough, and we are renewing our efforts to deliver sustainable, profitable growth in this part of the business."

"I am looking forward to the important seasonal period ahead, and am confident in our plans to deliver further improvements in our shopping trip for customers."

Prior to today, City experts were expecting Tesco's current-year earnings to slide 14% to 32p per share and the dividend to remain at 14.8p per share. The projections currently place the shares on a P/E of 10.6 and yield of 4.4%.

Whether today's Fresh & Easy review, the third-quarter sales update and the current share-price valuation make Tesco a 'buy' today remains up to you.

However, one investor that has already decided Tesco is a 'buy' is billionaire stock-picker Warren Buffett. The so-called Sage of Omaha owns about 5% of the retailer and this special Motley Fool report reveals exactly why he bought and what price he paid.

As you may already know, Mr Buffett rarely makes large investments outside his native United States. In addition, he always demands a wide margin of safety when investing. So perhaps after Tesco's news today, he continues to sense a bargain.

If you're tempted to follow Mr Buffett into Tesco, please click here to read the exclusive 'Buffett Buys Tesco' report before you press the 'buy' button. The report is free.

> Maynard does not own any share mentioned in this article. The Motley Fool owns shares in Tesco.

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Comments

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SevenPillars 05 Dec 2012 , 3:37pm

I've said before that Tesco's share price will benefit from giving up on the US because it is what the market wants to see. This is probably the first step in that direction and while Clarke says that all options are open, I doubt after this statement that Tesco doing it alone in the US as Fresh and Easy is one of them. Chances are they sell up and the city will like that.

MrBearBull888 05 Dec 2012 , 4:40pm


Yes it's the best news I have heard. Hopefully we will not get all those US Labour unions at the AGM. Except of course to say I told you so - in 2011!.

Certainly has taken them a long time to wake up to reality.

MrBB
Sage of No Where.




ANuvver 05 Dec 2012 , 4:40pm

The city already seems to like the change in mood music.
BTW, the great Buffett is on record as wanting Tesco to ditch its US operations.

yossa123 05 Dec 2012 , 5:22pm

You think they would have learnt from Wallmart - duplicate the stealth strategy they used in their their purchase of Asda - e.g buy a good old fashioned "apple pie" american retailer, put on the cloak of invisibilty and continue to run it under its own name so the natives see it as the same business they have known for decades.

lotontech 05 Dec 2012 , 7:57pm

I for one was pleased to see how the Tesco share price reacted to this news: http://goo.gl/Au23P

ANuvver 05 Dec 2012 , 9:56pm

I like Nils Pratley's take on Tesco's US operations - Stale & Difficult. Apparently the chap that invented the Clubcard is the one who headed up the US ops, and is now being put out to pasture with a few pat boardroom platitudes and a big gold clock. How the wheel turns...

Apparently, the amount Tesco has splurged on F&E is equivalent to something like a year and half's dividends.

A company finally cutting and running on a project that hasn't delivered can be a useful SP catalyst. Was hoping they'd fall towards 310 before dipping in my beak, but I guess I'll have to be patient a while longer.

MDW1954 05 Dec 2012 , 10:38pm

Over my SIPP and ISA, I've pretty much increased my holding sixfold this year. £2.98 in the summer was a steal, and I loaded up then too.

Warren Buffett is another savvy investor who's loaded up ... oh no. Sorry.

Malcolm Wheatley (Fool writer)

richjfool 06 Dec 2012 , 1:29am

Neil is going to be eating his heart out that he sold. Will that make him a fully fledged "fool"?!

F958B 06 Dec 2012 , 8:36am

rich

I thought Woody rolled some or all of the Tesco proceeds into Morrisons.
Although Morrisons haven't had the short sharp drop in the share price that Tesco suffered, the shares of Morrison have drifted off almost 20% during 2012; not much different to Tesco.

In fairness to both MRW and TSCO: the sector as a whole is rather unloved at the moment and I like both companies on a long-term view.
SBRY began moving higher a few months ago on rumours of a buyout from Delta-Two, pending discussions with the Sainsbury family.

Woody also sold National Grid, United Utilities and Severn Trent in late 2010. All three being good performers for both capital gains and dividends since that time - the water sector helped by talk of buyouts from Canadian pension funds (rather them than me, at recent prices for the water companies!).

ANuvver 06 Dec 2012 , 2:49pm

F:

Regarding NG, I rather agree with St Neil. It's a political call as to the extent to which regulators will clamp utilities and structure the funding for massive infrastructure overhaul. But the one certainty is that the overhaul is coming. I think researching engineers and such that will be competing for the contracts could yield much better value in that context.

Seems there is still a lot of rather old-fashioned thinking around about utes. One accepts high levels of borrowing and a degree of regulatory risk with a utility, but I suspect people are being rather blase about the latter. And I agree with you - I'm all for yield, but not at these prices.

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