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.
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
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.