Tesco in New UK Push as Profit Meets Expectations

Tesco, one of the world’s biggest supermarket companies, met analysts’ expectations for growth in full year earnings announced Wednesday.

The Holyhead branch of Tesco on the Isle of Anglesey, North Wales, on November 19, 2010 in Holyhead, United Kingdom.
Christopher Furlong | Getty Images
The Holyhead branch of Tesco on the Isle of Anglesey, North Wales, on November 19, 2010 in Holyhead, United Kingdom.

The retail giant, long thought of as one of the stalwarts of the FTSE 100, had fallen out of favor after issuing its first ever profit warning in January.

Its underlying profit before tax for 2011 rose 1.6 percent to 3.9 billion pounds ($6.2 billion), but profit in the UK, its biggest market, fell by 1 percent to 2.5 billion pounds. Consensus estimates according to Reuters were 3.88 billion pounds.

Tesco announced that it will invest 1 billion pounds in a revamp of its UK stores in an effort to attract more UK consumers. Richard Brasher stepped down as head of its UK business last month after disappointing sales over Christmas. The chain is also opening fewer hypermarkets and concentrating on its smaller stores.

Laurie McIlwee, chief financial officer of Tesco, told "Squawk Box Europe": “What’s becoming increasingly difficult is to find prime locations for extremely large stores. The business is going to be more focused on food and better clothing departments.”

He said that fresh food was particularly important because of the “halo effect” of attracting more customers who will then spend more money in other parts of the store.

“The 1 billion pounds is really split between capital investment and around 750 million pounds in revenue expenditure. A large proportion of that is around value and better, more targeted Clubcard [the store's fidelity card] promotions, and better service,” he said.

Hiring Plans

The UK’s biggest retailer is also relaunching ranges like its Value (lower cost) range and the upmarket Tesco Finest range.

Tesco is planning to hire about 8,000 new employees in its UK stores to improve customer service.

McIlwee added that there will also be a big focus on the development of the internet site.

Tesco’s UK banking arm will offer mortgages for the first time this year after migrating from RBS’s banking systems.

“We think that’s still retailing, not investment banking,” McIlwee said.

A relatively poor performance in the UK was offset by stronger performance in Tesco’s international operations. Sales grew by 9.5 percent in its international business, buoyed by double-digit growth in its Asian sales.

Its U.S. arm Fresh & Easy cut its losses by 17.7 percent to 153 million pounds - still larger than hoped for.

“It’s not as good as we wanted it to be,” McIlwee admitted. “In the next year you’ll see further improvement. It’s only a small push that will get loss-making stores over the line. We need to make sure that we’ve got the model right before we scale it.”

He denied persistent rumors that Tesco is planning a sale of the business once it becomes profitable.

“We’re building this business for the future, not to sell it,” he said.