Tesco's billion-pound reality check: first profit drop for 20 years

The UK's largest retailer has been force-fed a slice of Tesco's Finest Humble Pie today, after its written-off US venture Fresh & Easy pushed profits down for the first time in almost two decades.

by Michael Northcott
Last Updated: 19 Aug 2013

It’s safe to say Tesco’s American venture – Fresh & Easy – has been a disaster. Unfortunately for former CEO Sir Terry Leahy it marks a considerable portion of his legacy at the firm, he stands to lose up to £10m worth of performance-related shares as a result. He may have retired, but after today’s results, shareholders are still feeling the pain. Pre-tax profits for the full year were down a massive 51% from £4bn to £1.96bn.

So what has caused the damage? Well, first there’s the £1.2bn impairment charge for exiting the US business, then there is an £804m property writedown (which City analysts were not expecting, by the way) relating to building and development projects in the UK that it has decided not to pursue any further. The company’s tweaked property strategy now means that around 100 sites that it bought in the last decade to do up will no longer get their makeover.

It gets worse: there was also a near half-billion pound writedown in central Europe for similar reasons and a £115m fund created for compensation for mis-sold payment protection insurance in its banking arm. That friendly slogan ‘every little helps’ suddenly doesn’t seem as chirpy when you throw in a pile of PPI complaints.

With results like these, you might wonder what Tesco could possibly say to assuage shareholders’ grief. Chief executive Philip Clarke said: ‘The announcements made today are natural consequences of the strategic changes we first began over a year ago and which conclude today. The consequences are non-cash write-offs relating to the United States, from which we today confirm our decision to exit, and for UK property investments, which we will not pursue because of our fundamentally different approach to space.’

Being straightforward and honest about poor results did not keep shareholders happy however: the price of shares fell 3.1% in morning trading on Wednesday. To be fair though, the drop was not as dramatic as it might have been. Perhaps this reflects the long held expectation that Tesco would ditch the project under Clarke, but also the long-term benefit to the balance sheet. No longer burdened with hundreds of US stores and their massive distribution network, Tesco will no doubt be in a stronger position for next year.

Does this mean that the worst is over for Tesco? It’s had a tough year since announcing a profit warning last January. It has begun work on a £1bn refurb programme for its stores, and has hired thousands of extra staff as a concerted effort to ‘be better for customers’, according to Clarke. Now shareholders can only wait and see what the next set of half-years reveals…

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