Tesco: what the experts say

Supermarket giant Tesco has reported underlying profits up 14% to £1.8bn in the first half. Sales increased 8% to £32.9bn in the six months to 28 August. UK like-for-like sales for the second quarter were up 0.4% (excluding VAT and fuel). Dave McCarthy, retail analyst, Evolution (These) results relied on a lower tax and interest charge to compensate for a weaker underlying performance. Continued UK under-performance and increased losses in the US are a concern, although the pick up in Asia and Europe is encouraging. Overall, given the UK is the majority of the business, we remain concerned. It is easy to be positive on Tesco as headline numbers look OK, but when we look underneath, things are not quite so rosy. We retain our 'reduce' recommendation and 375p price target ... Tesco has been the worst performing UK food retailer (this) year. Neil Saunders, consulting director, Verdict Although Tesco's first-half results show positive sales growth of 8.3%, the UK picture is less encouraging with almost flat like-for-like sales and an apparent loss of traction in non-food. The headline number shows a robust performance from Tesco and demonstrates its strategy of driving growth through international expansion continues to pay dividends. The improved sales performance of the Fresh & Easy concept in the US is particularly encouraging and we believe that over the longer term this continues to represent a major opportunity for both sales and profit growth. However, beneath the headline number UK performance is far more muted and excluding the boost from higher petrol prices and the rise in VAT, underlying sales growth is pretty anaemic. As the largest grocer in both sales and space terms, it is becoming increasingly difficult for Tesco to eke out incremental growth from the UK market. In particular, after a good performance last year, non-food seems to have slipped back significantly. While this part of the market is more challenged because of the economic slowdown, it remains Tesco's biggest growth opportunity in the UK and an improved performance on both an overall and like-for-like basis will be necessary to drive the business forward in the next few years. Clive Black, retail analyst, Shore Capital Trading conditions were tough for Tesco UK which recorded low like-for-like (LFL) sales by its standards with second quarter LFL up by only 0.4% (ex-VAT and fuel) implying negative volumes if we assume positive food inflation. Like Morrison, Tesco speaks of the depressant effect of fuel on store sales. However, Tesco management operated the business, increasing the trading margin by 10 basis points to 6.1%. Perhaps the big surprise today is the announcement by Tesco that it expects Fresh & Easy to be profitable by 2012/13, three years ahead of our expectations. This is a material development and one that could significantly swing sentiment for the group. LFL sales were up by 9.6% with total sales up by nearly 50%. Finally, this is a noteworthy occasion for any Tesco watchers, these results being the last to be presented by CEO Sir Terry Leahy. There will be further opportunities to reflect on his tenure but we believe that he has been an outstandingly successful businessman and guardian of Tesco in his time at the helm for investors and all other stakeholders in the group and we wish him a long and fruitful retirement next year. James Grzinic, retail analyst, Jeffries International Steady update from Tesco with UK sales lighter than we expected but surprising margin progress ... the result is a 2% beat at a group level versus our expectations and in-line with consensus. At a top line level UK performance looks more subdued than that recorded internationally, but margin progress looks surprisingly solid. UK LFL was 0.4% in Q2, still well below Morrison's 1% and the 1.3% expected from Sainsbury's tomorrow. Grzinic said UK profits before financial charges of £1.22bn – compared with his forecast of £1.2bn – was "remarkable" given the headwind from petrol mix, clubcard initiatives and property charges. Kate Calvert, retail analyst, Seymour Pierce These results show good cost control in the UK and internationally, Tesco is seeing the benefits of the global economic recovery and the benefit of food inflation come through. The UK result reflects a lacklustre LFL sales line (despite double clubcard points), adverse petrol mix and good cost control resulting in operational leverage. Internationally, there has been LFL recovery through the H1 (first half) from both Central Europe and Asia as the benefits from the global economic recovery come through. US H1 losses actually increased to £95m, when the market was expecting it to fall on last year's £85m loss. On the positive side management has now given another break-even target for Fresh & Easy and expects it to reach profitability during 2012/13 driven by increasing the number of stores. Tesco is well positioned to benefit from global economic growth and inflation, which tends to be positive for food retailers. We reiterate our buy recommendation. Michael Burt, retail analyst, Execution Noble analyst Tesco is the UK's most profitable property developer. In the six months to the end of August, Tesco realized a profit of £261m from the sale and leaseback of £1.2bn in property from its store portfolio. The UK real estate sector dreams of development profits of 27% on cost and in absolute terms none of the listed REITs (including Land Secs and British Land) is likely to generate similar levels of development profits over the next three years. The secrets of Tesco's success as a developer are simple; zero pre-letting risk and a rock-solid tenant covenant. As a result, when Tesco comes to sell one of its superstores, typically with a 20-30 year lease and RPI-linked rental uplifts, there is sufficient institutional demand to bid yields below 5% (the last major sale and leaseback of £950m of property in July 2010 was at 4.9%).