Oct 5, 2015
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Tesco profit slump shows turnaround task ahead

Oct 5, 2015

Britain's biggest retailer, Tesco, is expected to report this week that operating profit more than halved in the first half of its financial year, raising questions about new management's turnaround plan.

With former Unilever executive Dave Lewis brought in just over a year ago to revive Tesco's fortunes after a drop in UK market share, investors will want to see evidence of improvement in its key home market when it publishes second-quarter sales and first-half results on Wednesday.


They will also focus on any signs that food price deflation is easing and trading conditions are improving after rival Sainsbury's last week beat second-quarter sales forecasts and raised its profit outlook, sending shares across the battered sector higher on hopes the worst is over.

Because Tesco only recently moved to make operating profit before one-off items its headline performance measure, few analysts have provided forecasts for the first half of its 2015-16 financial year.

Of those that have, HSBC sees an operating profit of 385 million pounds ($585 million) and Cantor Fitzgerald a profit of 330 million pounds. Those compare with 916 million pounds in the first half of Tesco's 2014-15 year and reflect continuing falls in underlying UK sales as market share is lost to discounters Aldi and Lidl.

The forecasts also reflect the cost of Lewis' moves to cut prices, improve product availability and customer service as well changes in the way it does business with suppliers in the wake of last year's accounting scandal.

Lewis has put fixing the UK business at the heart of his strategy. He has repeatedly cautioned Tesco's recovery will not be a straight line and will likely point to further improvements in the volume of goods sold and increased transactions.

Analysts forecast a 1.0-1.5 percent fall in second-quarter sales at Tesco's British stores open over a year. That compares with a 1.3 percent decline in the first quarter.

"Ultimately, we believe it is more important what management say about the months and years ahead than what they have delivered in the first half of this year," said HSBC analyst Dave McCarthy.

The strength of Tesco's balance sheet will be another focus. Lewis wants to cut costs, slash debt and rid the firm of its junk credit rating.

A $6.1 billion deal to sell Tesco's South Korean unit, Homeplus, its biggest overseas asset, will reduce total indebtedness, which stood at 21.7 billion pounds at the end of February, by 4.2 billion pounds.

Lewis has, however, so far failed in an attempt to sell customer data business Dunnhumby, while Chairman John Allan told shareholders last week the firm had not discussed any further material overseas disposals.

That raises questions as to where Lewis will look next for divestitures or if he will reconsider seeking cash from shareholders.

$1 = 0.6583 pounds


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