Tesco U.S.: Still fresh, not so sure about easy
NEW YORK —Tesco took pains to counter speculation that its Fresh & Easy stores in the United States had not performed up to expectations as it announced strong results for the latest fiscal year. The numbers were sufficient to provide an immediate 4.5% lift in the company’s share price, but they and ceo Terry Leahy still left unanswered questions about just how well Fresh & Easy is really performing.
Tesco’s group sales rose 11.1% to £51.8 billion while profit before tax rose 5.7% to £2.8 billion and diluted earnings per share rose 14.2% to 26.61 pence.
Interestingly, in comments critical of both the news media and the analyst community, Leahy said that reporting about Tesco problems in the United States might be regarded as a combination of rush to judgment and the expression of varying agendas, but he didn’t remark upon Tesco’s own role in generating criticism.
The company’s optimistic appraisals about its U.S. prospects generated reasonable skepticism and, while many within Tesco have adopted a more measured tone, particularly since the company announced a few weeks ago that it was taking a pause in its U.S. rollout, Leahy continued to speak of the United States in glowing terms saying, “I’m more than very encouraged. I’m delighted with our experience in the United States.” He added that things were going so well that the company was accelerating its development of the Northern California operation and continued on to say, “As far as the customer is concerned, they love it. And we’re getting the best feedback we have ever had from any format that we’ve opened anywhere.”
All that being said, he admitted that as regards the Fresh & Easy rollout, Tesco “was only 167 days into it” and had more to learn, which is another suggestion from a Tesco manager that at least some facets of Fresh & Easy merchandising might be revisited.
In support of its U.S. operations, Tesco said it is enjoying strong growth in the stores initially rolled out and solid sales in more recent openings in Southern California, Nevada and Arizona. The company also said sales for its best stores beat $20 per square foot per week, but also indicated that its average was above, but much closer to, the U.S. grocery store average of around $10.
A report prepared by Citigroup analysts James Anstead, Jérôme Samuel and Amy Crofton played up the sales densities figures saying that the numbers “suggest that the worst fears expressed in some quarters can be discounted. The steady improvement in sales bodes well for the future.”
Tesco previously said its sales-per-square-foot target was $14 to $21, according to the Citibank analysts. Yet, comparing Fresh & Easy—which is home meal replacement and convenience product heavy—to U.S. grocery stores may be misleading.
And the Citigroup analysts added a codicil to their otherwise positive appraisals. They noted that the £100 million operating loss that the company now posits for the 2008-2009 period is about four times what the consensus estimate had been, suggesting that profitability is a long way off.
So are comparable-store numbers and, until they emerge, Tesco will have the ability to interpret its results pretty much as it likes.