Apr 11, 2014
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Tesco's problems mount as profit set to fall again

Apr 11, 2014

London, UK - Tesco is expected to report a 6 percent fall in annual profit next week, a second straight decline which would pile the pressure on boss Phil Clarke who is struggling to turn around Britain's biggest retailer.

Having dominated the high street for years, the 95-year-old Tesco stunned the industry in 2012 when it issued its first profit warning in two decades. Despite billions of pounds of investment, it has struggled since then and two months ago Clarke abandoned an industry-leading target for operating margin in the UK.

Problems at the world's third largest retailer after Wal-Mart and Carrefour have been exacerbated by the April 4 resignation of Finance Director Laurie McIlwee, leaving CEO Clarke as the only executive director on Tesco's board.

McIlwee's exit prompted questions over whether Clarke has a sufficient grip on Tesco's future, and over whether now is the time to re-appraise the firm's management structure. Its shares are trading near 10-year lows.

"The departure of McIlwee is symptomatic to our minds of a business that is not at ease with itself, united in its direction and comfortable within its own skin," said Shore Capital analyst Clive Black.

According to forecasts published on Tesco's website, analysts expect the firm to post a group trading profit of 3.18-3.33 billion pounds for the year to February 14 2014, with an average forecast of 3.24 billion pounds, down from 3.45 billion pounds in 2012-13.

The firm's dividend is, however, expected to be maintained at 14.76 pence a share, despite the decline in earnings.

The group makes over 60 percent of group revenue and profit in its home market, where it has been losing market share.

Tesco, in common with the country's three other leading grocers - Wal-Mart's Asda, Sainsbury's and Morrisons - has been squeezed between hard discounters Aldi and Lidl and upmarket grocers Waitrose and Marks & Spencer.

Although Britain's economy is recovering from a long and deep recession, household budgets remain under pressure due to subdued wages growth, with many shoppers looking to save money on basics to allow them to splash out on the occasional treat.

Monthly industry data, published April 8, showed Tesco's UK market share had shrunk to 28.6 percent, its lowest level in nearly a decade.

Sales at British stores open over a year, excluding fuel and VAT sales tax, fell 2.4 percent in the six weeks to January 4 and analysts forecast a slightly worse number for the entire fourth quarter.

Clarke, a 40-year Tesco veteran who himself raised eyebrows last month when he said at an industry conference that his tenure as CEO might only be "for a few years", is two years into a turnaround program for the grocer's over 3,000 British stores, having spent over 1 billion pounds on refits, more staff, new product ranges and online services.

However, he said he believed he still had the backing of investors, who accept that big companies take a long time to turn around.

"I know our business is getting better. There is a lag between it getting better and people talking about it," he said then.

In February Tesco said it would spend an additional 200 million pounds on lower prices for basic products and a similar amount on a fuel savings scheme for holders of its Clubcard loyalty card.

As well as Tesco's troubles in the UK other factors weighing on earnings include unfavorable foreign exchange rates and disruption to trading caused by political unrest in Thailand and Turkey.

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