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Tesco profit tops 3 billion pounds, says consumer steadier

LONDON - Tesco, the world’s No.3 retailer, showed its resilience to the economic downturn, posting a 10 percent rise in underlying annual profit to 3.13 billion pounds ($4.6 billion), a record for a British retailer.

Shares in the supermarket group, which employs 440,000 people in 4,000 stores across 14 countries, jumped as much as 5 percent in early Tuesday trading and boosted retail stocks across Europe which have been hit by a steep economic downturn.

Tesco said sales growth in its main British market had accelerated in its new financial year.

Chief executive Terry Leahy told Reuters consumer spending was stabilising, though it was too early to forecast a recovery.

He also said it was impossible to say when Tesco’s U.S. business would break even because of a deep recession there.

Tesco had planned for its U.S. Fresh & Easy chain to break even at the end of its 2009-10 fiscal year, but said it now expected the business to make a similar trading loss to the 142 million pounds for the year just ended.

Leahy said he was “absolutely” committed to the U.S. chain.

Retailers across the world have been struggling as shoppers curb spending amid rising unemployment. France’s Carrefour, the world’s No.2 retailer, last week reported its first quarterly decline in sales for six years.

On Tuesday, British luxury goods group Burberry said revenue growth slowed in the second half of its fiscal year, though Associated British Foods said its discount clothes unit Primark was thriving.

Asian Growth

Tesco said strong growth in Asia, boosted by last year’s acquisition of Homever stores in South Korea, and robust profit margins in Britain had helped to offset more sluggish growth in Europe and losses in the United States.

Sales rose 15.1 percent to 59.4 billion pounds in the 53 weeks ended Feb. 28. The dividend was raised 9.7 percent to 11.96 pence.

Analysts’ median forecast was for Tesco to make profit before tax and one-off items of 3.04 billion pounds, according to a Reuters Estimates poll of 19.

“Another year of solid top and bottom line delivery,” Cazenove analysts said in a research note. “Current trading is showing an improved trend against tougher comps (comparative figures in the same time last year) and forecasts look secure.”

At 0810 GMT, Tesco shares were up 4.6 percent at 347.2 pence, valuing the business at about 27.4 billion pounds and helping the DJ Stoxx European Retail Index to rise 1.8 percent, making it the best performing sector in Europe.

Improving Trend

Tesco shares have matched the pan-European index over the past year but trade at a discount as a multiple of forecast earnings to rivals such as J Sainsbury and Morrison on concerns it is losing British market share.

Sales at Tesco’s British stores open at least a year, excluding petrol, rose 3.4 percent in the first six weeks of its new financial year, up from 2.7 percent in the fourth quarter.

Sainsbury posted a 6.2 percent rise in underlying sales for the 11 weeks to March 21, but Tesco says its growth is being curbed by shoppers swapping to its cheaper discount brand range.

Britain accounts for about 70 percent of Tesco’s sales and over three-quarters of its trading profit.

Tesco said it planned to cut capital expenditure to 3.5 billion pounds this year from 4.7 billion pounds in 2008-09, with lower investment in Britain and more cautious expansion in some foreign markets, like the United States.

Nonetheless, the group expects to add 26,000 jobs and over 8 million square feet of new space, including 75 percent abroad.

Net debt jumped over 50 percent to 9.6 billion pounds to pay for an acquisition in South Korea and a deal to buy Royal bank of Scotland out of a financial services joint venture.

Leahy said the group planned to cut this by about 1 billion pounds this year. He also said Tesco would target cost savings similar to the 540 million pounds achieved last year.