Tesco, the UK’s largest retailer, has said it expects to see an improvement in the profitability of its European business in the second half after earnings tumbled in the first six months of the year.
The grocer this morning (2 October) saw its share price fall after revealing a sharp drop in first-half group earnings. Trading profit from its European operations was down almost 71%, with profits down in each of its markets in central Europe and losses in Turkey increasing “significantly”.
Speaking at the firm’s earnings conference today, chief executive Philip Clarke said Tesco was “disappointed” with the first-half performance in Europe, adding he “didn’t see how tough it would be”.
CFO Laurie McIlwee reiterated the group’s disappointment in the numbers and said the macroeconomic pressures in Tesco’s key markets were “clear for everyone to see”.
Outlining the issues Tesco has faced in each of its key markets, McIlwee suggested Ireland had had the largest impact on the decline in Europe.
“Most observers assumed Ireland wouldn’t see any further deterioration. It has of course experienced its second recession in five years. Ireland is our largest market by sales in Europe so it’s impact was one of the largest. Trading conditions deteriorated across the first half as Irish consumers faced another wave of austerity measures directly affecting disposable income. We have therefore seen discounters perform better than retailers like us with a broader offer.”
Poland, McIlwee said, was also a key factor in the decline. The economy, he said, continues to grow but has “dramatically slowed”. And in Turkey, the level of losses increased “significantly” year-on-year, reflecting Tesco’s relative exposure to discretionary categories and large store formats.
Shore Capital analyst Darren Shirley offered strong views on Tesco’s Europe performance. “Trading in H1 was pretty atrocious in a number of Tesco’s European markets. Management speaks of Europe offsetting progress in the UK in the full year, and we expect investors to be asking why is Tesco committed to these markets.”
Clarke, however, pointed to increased competition from discounters across Europe.
“In tough economic conditions the competition is improving its game. It’s not my style to duck these issues, we need to improve our game and that is precisely what we’ve been doing in the first half.
“In the first half we have invested to strengthen our core offer in all of our markets [In Europe]. We have switched more of our investment into digital growth. So we have made progress on our strategic priorities however challenging conditions have held back that performance.”
Nonetheless, both Clarke and McIlwee were confident Tesco’s European business could put in a better showing in the second half of the financial year.
“We expect the [Europe] business to improve its performance. If we thought it would have ended up this way in the first quarter we would have told you. We didn’t expect it to be so bad, but slowly but surely we’re starting to see the benefits.”
McIlwee said the second half would be “much better than the first”. He said: “Europe will be a challenging market for everyone for some time to come. We are not helped by competitive headwinds, they remain strong, but we are absolutely focused. I am encouraged by the progress we are making. It is not immediately visible in the report but we are a very different business to the one we were three years ago, one with strong foundations for the future. We expect a better level of profitability in the second half.”
“In Ireland, while trading is tough, we have strong plans in place. The economy is fragile but it is starting to grow again. The benefits of our investment in Poland are already starting to come through. And in Turkey, trends have improved in addition to our increased management focus. Its profits suffered from a one-off loss of GBP20m last year.” Tesco said it has focused the business on “driving growth in its heartland” around Izmir.
While Europe remains something of a headache for Tesco, the retailer pointed to improvements in the UK, where it has sought to freshen up its stores, invest in staff and relaunch product ranges to try to revitalise sales.
Eighteen months after announcing a GBP1bn turnaround plan for the UK market, McIlwee said “optimism is returning” in the UK.
Like-for-like sales excluding VAT and fuel dipped 0.4% in the first half. The grocer, however, pointed to an increase in profits from its UK business, once its banking arm was excluded from the numbers.
“In the UK our plans to build a better Tesco have continued apace. Clearly we still have further to go but this is a positive performance, considering tough comparatives. The major driver of the improvement is our food business.”
Tesco’s share price was down 3.12% to 347.90 pence at 13:03 BST today.