BL: Tesco Profit Beats Estimates on Gains in Asia, Europe (Update6)
By Amy Wilson
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April 15 (Bloomberg) -- Tesco Plc, the U.K.'s biggest supermarket company, reported annual profit that beat analysts' estimates on higher revenue in Asia and eastern Europe, and said British sales growth has accelerated since February.
Net income climbed 12 percent to 2.1 billion pounds ($4.2 billion), or 26.61 pence a share, in the 12 months ended Feb. 23, Cheshunt, England-based Tesco said today. That exceeded the 2.05 billion-pound average of 13 estimates compiled by Bloomberg. Excluding sales tax, revenue rose 11 percent.
Tesco rose to a two-month high in London trading after saying U.K. revenue strengthened even as the worst housing slump since at least 1978 weighs on consumer confidence. Overseas sales increased 23 percent, the fastest pace in 4 years. The stock has still 14 percent in 2008 on concern about demand in both Britain and the U.S., where Tesco opened its first stores in November.
``Tesco has yet again confounded its doubters,'' said Richard Hunter, head of U.K. equities at Hargreaves Lansdown stockbrokers in London in a note. ``International sales have again weighed in with another strong contribution. There are few signs of any erosion of Tesco's substantial market share.''
The 12 percent pace of full-year profit growth was still Tesco's slowest in eight years. Second-half net income was 1.19 billion pounds in the six months ended Feb. 23, up from 1.1 billion pounds a year earlier.
Tesco rose 22 pence, or 5.6 percent, to 413 pence at noon local time. Its market share in British groceries is 31 percent, almost the same as rivals Asda and J Sainsbury Plc combined.
`Strong Start'
Earnings had a ``strong start'' in the current year, Tesco said, with U.K. same-store sales rising 4 percent excluding fuel in the first five weeks, up from 3.5 percent a year earlier. Total sales rose 13 percent.
This will still be a ``tougher year'' for U.K. shoppers, Finance Director Andy Higginson said today by telephone. ``The business and supply chain are designed to cope with that,'' he said, adding that Tesco cuts costs by ``hundreds of millions of pounds'' a year. He advocated further interest-rate reductions by the Bank of England to support consumers.
Tesco cut prices on more than 12,500 products in Britain in 2008's first three months to retain customers. U.K. consumer confidence fell to the lowest in almost four years last month as living costs sapped incomes. A property-market slump has become the worst since records began in 1978 as mortgage lending dries up, according to the Royal Institution of Chartered Surveyors.
Music Downloads
Non-food sales in the U.K. grew more slowly than in previous years, Tesco said. Still, they gained 9 percent to 8.3 billion pounds, or 22 percent of total revenue in Britain, and Higginson said Tesco aims to double its non-food market share from its current 8 to 8.5 percent.
The company also announced a music-downloading service today, and said online sales rose 31 percent to 1.6 billion pounds last year.
Goods such as clothes and televisions are most at risk from lower spending, analysts including Societe Generale SA's Tom Gadsby have said. Electronics seller DSG International Plc last week cut its earnings forecasts for the second time this year.
In the U.S., sales at the Fresh & Easy chain are ``ahead of budget,'' Tesco said. It has sales of more than $20 per square foot in its best-performing stores, Higginson said, beating local rivals. The unit had a trading loss of 62 million pounds last year, which Tesco expects will increase to 100 million pounds this year and then start to fall as sales pick up.
Fresh & Easy
Tesco said in March it was putting the chain's expansion on hold for three months. The retailer has 60 U.S. stores, after opening the first in November, and said today it plans to open 150 stores in this fiscal year. Plans to open a second distribution center in northern California are under way.
Concerns about Tesco in the U.S. are ``overplayed a little bit,'' according to Jane Coffey of Royal London Asset Management, who said Tesco is the only retail stock she owns. ``It represents such a small amount of their business so far. They want to expand in the U.S., but they don't want to do it at the wrong time.''
Finance director Higginson said plans to raise 5 billion pounds through property sales are on track, and Tesco made 207 million pounds from selling land to insurance company Prudential Plc in February. The company said it's in talks with several companies about more sales.
In March, Goldman, Sachs & Co. analysts cut their rating on Tesco to ``sell'' on concern that higher food prices and slowing consumer spending will hurt earnings. Rising dairy and wheat costs have spurred food makers from Premier Foods Plc, the baker of Hovis bread, to Cadbury Schweppes Plc to raise prices.
Tesco said today inflation was ``modest'' at 1.2 percent, as the cost of non-food items declined and offset higher food costs. In the fourth quarter, inflation rose to 2 percent as commodity prices continued to increase.
Chief Executive Officer Terry Leahy said today he expects commodity costs to decline, according to a Sky News interview.
To contact the reporter on this story: Amy Wilson in London at awilson23@bloomberg.net.
Last Updated: April 15, 2008 07:20 EDT
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