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Tesco Quits US as Profits Fall for First Time in 20 years

A customer carries Tesco-branded shopping bags as she leaves one of the company's stores.
Simon Dawson | Bloomberg via Getty Images
A customer carries Tesco-branded shopping bags as she leaves one of the company's stores.

Tesco, Britain's biggest retailer, will exit its loss-making business in the United States, taking a $1.5 billion write-off that caused its annual profit to fall for the first time in 20 years.

The group also wrote down the value of its property in Britain by 800 million pounds and its businesses in Poland, Czech Republic and Turkey by half a billion pounds and said growth in its core home market had slowed despite huge investment.

Shares in the group were down 2.8 percent in early trade giving the group a market valuation of 30.3 billion pounds.

The announcements were designed to signal a turning point in the fightback for what was once one of Britain's most consistently performing companies - the world's third largest retailer after Wal-Mart and Carrefour.

"The announcements made today are natural consequences of the strategic changes we first began over a year ago and which conclude today," Chief Executive Philip Clarke said.

"I've been working for Tesco for nearly 40 years and I can tell you this - it already looks, feels and acts like a different and a better business."

It made a pretax profit of 1.96 billion pounds in the year to Feb. 13, down 51.5 percent. It also reported a 14.5 percent fall in underlying full-year profit, largely reflecting the cost of a turnaround plan for its home market, launched after a shock profit warning in January last year.

Despite the heavy investment, the group said fourth quarter sales at British stores open over a year, excluding fuel and VAT sales tax, grew 0.5 percent - a slowdown from growth of 1.8 percent in the six weeks to Jan. 5.

That was however at the top end of a range of forecasts of 0 to 0.5 percent and the strongest quarterly growth for three years, the company said.

Tesco's 1 billion pound fightback plan for Britain focused on more staff, refurbished stores, revamped food ranges and price initiatives - all aimed at reversing years of underinvestment and halting a loss of market share to rivals like J Sainsbury and Asda.

As it reviewed the British business, it also took a writedown of 804 million pounds on its property investments. The writedown on the operations in Poland, Czech Republic and Turkey hit half a billion pounds.

Tesco also said it had increased its provision to cover the possible miss-selling of insurance products at its Tesco Bank to 115 million pounds.

The group's earnings have also been hit by restrictions on store opening times in South Korea.

BACK ON TRACK?

Following the retrenchment in the U.S., it now expects to deliver mid single digit trading profit growth, a return on capital employed within a range of 12 to 15 percent and dividend growth broadly in line with underlying earnings.

"Tesco's ignominious exit from the US will grab all the headlines but the truth is that even without the Fresh & Easy debacle the supermarket would probably still have seen its profits fall for the first time in 20 years," said Phil Dorrell, director of retail consultants, Retail Remedy.

"Slowly, things are getting back on track in the UK. The question now is can Tesco sustain its newfound momentum and increase profits in a still challenging global climate? 2013 is shaping up to be a critical year."

In the United States, it has decided to cut its losses and exit altogether.

Fresh & Easy, which trades from 199 stores and employs around 5,000, has absorbed over 1 billion pounds of capital since its 2007 launch when Tesco was run by Clarke's predecessor Terry Leahy but has never turned a profit in a market where it competes with the likes of Trader Joe's, Whole Foods Market and Wal-Mart

Clarke put the venture, which contributes just 1 percent of group turnover, under review in December, saying an exit was likely.

Chief Financial Officer Laurie McIlwee said there was "a lot of interest" in Fresh & Easy, with possible suitors for the whole business or parcels of stores.

"What we're most interested in is those buyers that are interested in buying the complete business that we have in the U.S.," he said, pointing out that a complete sale would remove redundancy and onerous leasehold leasehold issues.

He said Tesco would not conclude the process for at least another three months.

The group made an underlying pretax profit of 3.55 billion pounds. That compares to analysts' consensus forecast of 3.50 billion pounds, according to a company poll, and with 3.92 billion pounds made in the 2011/12 year.

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