In what was his final set of results, last week departing Tesco (LON:TSCO), CEO Sir Terry Leahy unveiled a robust set of results for the 6 month period up to 28th August. Total revenue climbed by more than 7% to almost £30 billion whilst pre tax profits increase by 12.5% to £1.6 billion. Whilst the group’s UK operations battled through tough economic conditions, sales across Asia reflected the rude economic health of the ‘new world’ in which Tesco has a burgeoning foothold. Tesco’s Asian love affair was clear and the group pulled in £5.3 billion in the region, 20% more (or 7.6% on a constant currency basis) than the same period last year thanks mainly to the roll out of new stores. Bright spots of note were Thailand and Korea, where the group’s 2008 acquisition of Homeplus is being vindicated in spades.
Elsewhere, sales at Fresh & Easy in the United States soared by 47% and in Europe, on both revenue and trading profit basis, the region marginally trailed Asia.
Making up two thirds of sales and 72% of group trading profit, the UK remains the main stage for Tesco. UK household budgets remain under pressure as higher petrol prices eat into discretionary expenditure however despite this Tesco still managed to post a trading profit of £1.2 billion, an increase of 5.5% from the corresponding period last year.
Tesco’s rise to dominate UK market-share over recent years has been rapid and profound. The group’s rivals however are beginning to claw back some ground and rather than increasing the group’s market-share, management will no doubt be looking to plug any holes and maintain the status quo. Whilst Tesco has maintained its pre-eminent position the group has experienced a slight fall in UK market share from 30.9% to 30.8%.
Tesco however remains a compelling play and investor sentiment will in our view strengthen as the economic outlook across the West improves. Underpinned by healthy operating cash flows and a robust property backed balance sheet, long term earnings look highly secure.
The company product range covers everything from milk to mobile phones, with mortgages to follow shortly… and it does so across a huge expanse. Sir Terry Leahy will be missed however Philip Clarke has been on the board since 1998 and knows his way around.
Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »
With rivals eating up the ground, the group must maintain its focus on the UK whilst expanding their global footprint. A mild increase in food inflation will help earnings and although household budgets and consumer spending remain under pressure there are signs that a growing number of shoppers are switching back to quality which is a reversal of the trend which has benefited the serial discounters.
Earnings are also set to benefit from growth across Tesco’s financial services offering. During the first half of the year Tesco Bank saw its top line grow by more than 15% and with its mortgage offering due to begin early next year Tesco may well prove the popular conservative name that the financial services industry is in need off.
This article was produced by Senior Research Analyst, Aamer Nawid
About the Author's Investment Research
On joining Fat Prophets, you’ll gain instant access to the Member’s area, packed full of information on a broad range of companies and markets. As a Fat Prophets Member, you’ll receive our weekly research reports (published 49 times per year), containing stock recommendations (buys, sells and holds) as well as… ...read more or visit website »
Disclaimer:
Fat Prophets has made every effort to ensure the reliability of the views and recommendations expressed in its reports. Fat Prophets research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication. However, like the markets, we are not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Fat Prophets and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Fat Prophets hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.
Tesco PLC is an international retailer. The activity of the Company is retailing and associated activities in the United Kingdom, the People’s Republic of China, the Czech Republic, Hungary, the Republic of Ireland, India, Malaysia, Poland, Slovakia, South Korea, Thailand, Turkey and the United States. The Company also provides retail banking and insurance services through its subsidiary, Tesco Bank. The services it offers in store, such as optician, pharmacy, phone shop or customer restaurant. As of February 25, 2012, it had over 180 opticians. Click & Collect is a component of its multi-channel offering. Its store and distribution networks give customers the opportunity to pick products whenever it suits them from over 770 stores, close to where they live or work. As of February 25, 2012, it had 45 stores, which offers grocery Click & Collect. In September 2012, it acquired Mobcast. In March 2013, the Company acquired Restaurant Group Giraffe. more »
2 Comments on this Article show/hide all
Over the last 18 years, Tesco has averaged approximately 10% per annum compound growth in turnover, earnings per share, profits and dividends. The latter, for example, was 2.1p in 1992, rising to 13.05p in 2009/10, and 17.56p is forecast for 2013 (numbers from Sharescope). 10% p.a. compound produces a doubling every 7 years. The latest interim dividend is 4.37p per share, up 12.3% on 2009.
Tesco has grown from a small grocer to be the world's third largest hypermarket group in 50 years, so it must be one of the best managed businesses in the world, IMHO. This remarkable track record is only possible when the top management is top quality.
It was the first large British business to embrace the internet and that side of its business has become a great success.
It is moving to become a serious competitor to the banks. Mortgages for example will become available in H1 2011, and current accounts by H2 2012.
Profits flow from its International growth and the only venture that looked unsuccessful, Fresh n Easy in the USA, is showing a good recovery with sales rising by a stunning 58% in the last 6 months. New stores are opening and unprofitable ones closed. Profitability is now expected by fiscal 2013.
Terry Leahy, the CEO is retiring in 2011, but the markets fears seem to be reduced by confidence in his successor Philip Clarke, who has a superb track record as head of international operations which have been the engine of Tesco's growing profits over the last few years. He said; "This is a global business with numerous avenues for growth.” Rapid expansion is planned for China, where Tesco is targeting large 2nd and 3rd tier coastal cities. Total international sales in Q2 rose 17.3%, and by almost 28% in Asia, with Thailand and Korea especially successful.
I have Tesco shares in most of the investment portfolios I manage. I like this business and intend to add when funds become available and the price is attractive.
MadDutch.
It's just a shame there are never any "sad tosser" baskets available at the door when I go. You always have to pick one up from the self-service checkouts. There are never enough staff on the proper checkouts either.
I guess that's just part of being efficient though.
More seriously, it seems to me that the whole supermarket just-in-time/huge truck fleet/using loss leaders in combination with high margin impulse items/etc etc based business model is rather vulnerable to things like energy and crop price rises going forward. Not to mention generally decreasing levels of cash in the customer wallet. All of which are a given IMO.
There has to be a bar somewhere above which it all breaks down and ceases to be profitable. It's all too complex and too optimised ...