Bloomberg News

Tesco Says Bank Delays to Hurt Profit Amid Weaker U.K. Sales

October 05, 2011

(Updates with Tesco Bank earnings in sixth paragraph.)

Oct. 5 (Bloomberg) -- Tesco Plc, the U.K.’s largest supermarket chain, said delays to banking products will reduce profit by 40 million pounds ($61 million) this year, adding to the grocer’s struggle to revive growth in its domestic market.

The retailer is deferring the introduction of mortgages until 2012 and slowing a switchover to new information systems following the end of a tie-up with Royal Bank of Scotland Group Plc, the Cheshunt, England-based grocer said today. Tesco also reported a 0.7 percent drop in second-quarter U.K. same-store stores, excluding gasoline and value-added tax, the worst performance in at least six years.

“The bank is not quite delivering and that is the big issue here,” Chris Hogbin, an analyst at Sanford C Bernstein, said by phone. “The U.K. performance is OK, a lot is going on and I can see how it might get better.” Hogbin has an “outperform” recommendation on Tesco shares.

Tesco’s U.K. sales trailed rival J Sainsbury Plc, which today reported same-store growth of 0.9 percent, excluding gasoline and value-added tax. Tesco is more vulnerable to reduced spending on discretionary items because it sells more non-food merchandise such as televisions and appliances. The retailer last month cut prices of 3,000 basic items such as milk and vegetables and said today that the so-called Big Price Drop campaign has been well received by shoppers.

Tesco rose 3.95 pence, or 1 percent, to 384.05 pence at 11:47 a.m. in London trading, trailing gains in the broader market. Sainsbury advanced 4.4 percent to 286.9 pence.

Non-Food Decline

Trading profit at the banking division fell by 66 percent to 44 million pounds, after a 57 million-pound increase in a provision for payment-protection insurance. Excluding the provision, the unit’s profit declined 22 percent.

Tesco Bank plans to slow the introduction of new products such as mortgages and current accounts after “technical issues” in the summer left some customers without access to their online accounts, the company said. This will lead to an extended period of “double running costs,” hurting profit.

Early signs from changes to supermarket pricing and non- food ranges are “encouraging,” Tesco Chief Executive Officer Philip Clarke said today on a conference call. Same-store sales of non-food ranges slumped 4.8 percent in the first half as shoppers visited large-format Extra stores less often, he said.

Last month’s price cuts are “the biggest change to our pricing policy for a number of years,” the CEO said. “We’re trying to make it a bit easier for customers.”

U.S. Loss

Tesco’s first-half trading profit, a measure which excludes property gains, rose 3.7 percent to 1.77 billion pounds.

Losses at the U.S. chain Fresh & Easy, which Tesco started in 2007, narrowed to 73 million pounds from 95 million pounds a year earlier. Tesco is opening new outlets in northern California and building customer numbers by adding in-store bakeries and freshly prepared meals. A plan to break even in the U.S. in fiscal 2013 is showing “promising early results.”

Trading profit in Asia, where Tesco last month announced it plans to exit Japan, rose 19 percent, buoyed by gains in Malaysia, China and Thailand. In Europe, where the retailer has stores in the Czech Republic, Poland, Hungary, Slovakia and Turkey, profit rose 12 percent.

In the U.K., where Tesco still gets about two-thirds of revenue, trading profit rose 4.5 percent to 1.27 billion pounds.

Still, Tesco’s share of U.K. grocery spending fell to 30.4 percent in the 12 weeks through Sept. 4 from 30.8 percent a year earlier, according to Kantar Worldpanel research.

The company said it’s “broadly comfortable with current market consensus forecasts” for fiscal 2012, adjusted for the provision at the banking unit.

--Editors: Paul Jarvis, Tom Lavell.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.


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