Tesco issued their preliminary results this week, and there were few major surprises in the financial numbers. As expected, the UK business had a comparatively poor year against its major competitors, offset by good growth in the rest of the world. But the US “Fresh & Easy” business still looks rather sickly. Group sales were up 7.4% which is not bad for most retail businesses in the current economic climate, but obviously less that past growth rates in Tesco.
The underlying e.p.s. of 37.4p is actually better than was forecast when I looked in detail at the company a year ago. But analyst’s current consensus forecast for this year are for a fall to 34.4p which takes into account the increased costs from investing in the UK business (more staff, store revamps, etc). Prospective yield is now 4.8%.
Let’s pick out a few highlights to comment on in the announcement. It says:
“the strength of our property-backed balance sheet was again demonstrated through continuing strong investor demand for our property sale and leaseback transactions….”.
But any fool knows that most sales and leaseback deals simply provide a short term cash flow benefit with a negative longer term impact on profitability (at least that is my past experience). It’s rather like flogging the family silver to make ends meet.
The Fresh & Easy business is noted as “showing promising results, with losses having fallen for the first time”, but breakeven seems to be drifting out and is now not expected to be reached until the 2013/14 financial year. In fact this business managed to lose £153m on sales of £630m last year. In essence it is sub-scale and inherently unprofitable. Now that it is a reasonable length of time since the former CEO who promoted this concept has departed, surely it’s time to bite the bullet and scrap this venture. It must be an enormous distraction of management time and effort, even if it does enable Tesco executives to spend a few weeks in sunny California when UK weather is bleak (yes, I know what this is about – been there, done that). In essence this business is surely still consuming cash that would be better spent elsewhere.
For example, the good news is that they are investing heavily in improving their on-line offering and the steps being taken to improve their UK business seem to make sense.
The Tesco Bank also seems somewhat troubled with exceptional costs, delays in “migration” and in the launch of new products. Again is this key to the Tesco customer offering and has Tesco got any special expertise in running banking services? I doubt it.
The company is trying to improve return on capital, which I am always keen on. But rather than doing “sale and leasebacks”, I would rather see disposals of some of these peripheral but probably capital intensive operations.
In summary it’s still a “work in progress” to get back to the historically quality business that Tesco used to be, with good growth prospects. But as a value play on a business that might recover if management don’t drop the ball, it may be worth considering by those investors who appreciate the dividend income.
The author may hold shares in this company, all opinions are his own and you should check any statements that appear factual and not rely on them before making an investment decision. The author is NOT a qualified analyst nor authorised to give investment advice. Whilst the author is a director of ShareSoc, all views expressed are entirely his own and not necessarily those of ShareSoc.