Bloomberg News

Tesco Shareholders Give Clarke Six Months to Turn U.K. Around

June 11, 2012

Tesco Plc (TSCO) Chief Executive Officer Philip Clarke, who took direct control of the grocer’s domestic business three months ago, has until the end of the year to convince some investors he can return the U.K. to growth after four quarters of declining sales.

“Six months is as long as anyone is prepared to wait for some material progress to appear,” said Tim Green, who helps manage more than 24 billion pounds ($37 billion) at Brewin Dolphin Holdings Plc, including Tesco stock. “We need to see some signs of progress, there is some impatience in the market.” The retailer gets about two-thirds of sales and profit from its home country.

Tesco shares have dropped 25 percent this year after the Cheshunt, England-based company reduced its profit outlook in January. Clarke will continue to oversee the domestic business “until further notice,” he said today. The CEO devotes two days a week to the U.K., where most of a planned 1 billion-pound investment in store refurbishment, new products and additional staffing is still to be made, he said.

The CEO’s decision to stick to direct control of the business differs from that of Lars Olofsson, the former CEO of French competitor Carrefour SA. (CA) Olofsson took over the running of that grocer’s flailing domestic business for less than two months last year after ousting the head of the business. Richard Brasher was appointed by Tesco to the new post of U.K. CEO when Clarke won the role leading the entire company in 2010. Brasher stepped down from the Tesco board in March after the retailer’s share of the U.K. market slid to a seven-year low and a price- cutting campaign failed to win back customers.

Past Star

“I want to see a lot more of the focus on the U.K. because it’s been such a star in the past and it’s rather caught us by surprise how quickly the slowdown has occurred,” said Paul Mumford, a fund manager at Cavendish Asset Management who has 772 million pounds under management.

U.K. sales at stores open at least a year fell 1.5 percent excluding fuel and value-added tax in the 13 weeks ended May 26, the retailer said today. That matched the median estimate of 13 analysts compiled by Bloomberg, and compared with the prior quarter’s 1.6 percent drop.

Tesco was unchanged at 302.8 pence as of the 4:30 p.m. close of trading in London today. The stock is on track for its third straight annual drop.

Clarke juggled the role of running the U.K. with visits to seven of Tesco’s 13 overseas territories in the quarter, saying he was too busy running the U.K. to visit all the regions as he would have otherwise done.

‘Tight Supervision’

The CEO’s management team spend one day a week in stores working on areas such as staff training, improved layouts and new ranges. He wouldn’t be drawn on the initial impact of the measures or a timetable for turning the business around.

Clarke “needs to make sure he is keeping a tight supervision on the improvement process,” Brewin Dolphin Holdings Plc’s Green said. “There has been an element of u- turn,” he said, given that Clarke established the U.K. CEO position and appointed Brasher last year. “He didn’t realize quite the extent of the U.K. weakness strategically.”

Customers are “delighted” with changes made so far, Clarke said today, adding that sales in the week leading up to this month’s four-day Diamond Jubilee holiday reached 1 billion pounds, its biggest-ever week outside of Christmas.

Clarke acknowledged that there was a step-up in coupon activity across the market in the past quarter, though such a policy “isn’t a long-term solution,” he said. Tesco was later than competitors to introduce vouchers to hard-pressed shoppers.

More Coupons

“We need to see sustained like-for-like relative improvement without reliance on these, in our view, blunt and expensive promotion instruments,” said Andrew Kasoulis, an analyst at Credit Suisse in London. Kasoulis has a hold recommendation on Tesco shares.

Sales at stores open at least a year rose 0.5 percent at Tesco’s international unit, compared with the median analyst estimate of an unchanged performance. Revenue growth at the U.S. Fresh & Easy chain slowed to 3.6 percent from 12.3 percent in the prior period, while same-store sales in both the Asian and European units increased 0.4 percent, Tesco said.

Clarke visited the U.S. a few weeks ago and said Fresh & Easy is a “challenger brand that is having to adjust itself to appeal to more and more customers.” A new ready-meal and fresh- food product range is being introduced in a few weeks time.

“The U.S. has been a disappointing drag for a long time,” Cavendish’s Mumford said. Tesco would be “better off if they weren’t there.”

Still, it’s at home that investors said they mostly want to see progress being made.

“His job is make-or-break to get the U.K. right,” said Brewin Dolphin’s Green.

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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