Downturn is over, says tesco boss as underlying profits surge

The grocery giant eyes growth in services and stores globally after signalling the end of the recession, reports James Thompson

Tesco, which operates in 14 countries including the UK, has faced recessionary conditions in most of its markets in the past year. In particular, it has had to battle a savage downturn in consumer spending in countries such as Ireland and Hungary, as well as the states in the US where it operates.

In the UK, which still accounts for 70 per cent of the group's profits, the grocery giant has also locked horns with rivals Asda, Morrisons, Sainsbury's and Waitrose, all of which have been firing on all cylinders.

Yesterday, Tesco delivered its final verdict on the year to 27 February: group underlying profits surged by 10.1 per cent to £3.4bn, on sales up 6.8 per cent to a jaw-dropping £62.54bn.

Clive Black, an analyst at Shore Capital, said: "Tesco has gone through an incredible year that has probably been quite stressful in terms of the geographic spread of the recession... and the outcome is very good in terms of the profits, cash generation and dividend growth of 9 per cent."

Tesco, the country's biggest grocer, said that all parts of its business – the UK, international and services such as banking and telecoms – had contributed to its leap in profits. The chief executive, Sir Terry Leahy, added: "Our business is now stronger than it was before the recession."

Of course, given its scale, there were a few blots on Tesco's copybook. These included a trading loss of £165m on its Fresh & Easy convenience stores operation in the US. In Japan, it suffered an impairment charge of £131m against the income statement over the year, following a further deterioration in the retail market. But Tesco said it was already seeing improvements in these areas.

Sir Terry said of the Fresh & Easy business: "We already know it is going to be a success. It will be a nice chain of several hundred stores but we don't know if it can be thousands of stores. But I believe it can be."

Tesco suggested there were still opportunities to be had in the British supermarket sector, despite its 30.3 per cent share of the grocery market dwarfing the 17.1 per cent of Asda and Sainsbury's 16.3 per cent.

The company said it had opened 2 million square feet of store space in its past financial year, including about 100 new Tesco Express and One Stop convenience stores. It plans to increase this to 2.4 million sq ft in 2010-11, though this is in part due to it "unwinding" the pipeline its property team has developed over previous years.

Over the past year, Tesco has demonstrated its determination to try to cement its position as the market leader. After its sales growth slipped behind that of its three biggest rivals in early 2009, Tesco launched a fierce fightback.

Of the initiatives launched, the most notable was a £200m investment to double the amount of money-off ClubCard vouchers last August.

Sir Terry said: "The industry has seen a significant slowdown in sales and we have not. And our relative performance has improved markedly and we are now leading the industry in growing market share."

For its final quarter to 27 February, City analysts said Tesco's closely watched like-for-like sales, excluding fuel, had come in at about 2.6 per cent, down from 2.8 per cent in the third quarter, although the grocer was hit by January's dreadful snowfalls.

While Shore Capital said Tesco was back in the pack with Sainsbury's and Asda, it estimated that the market leader's current underlying sales were behind those of Morrisons.

Tesco also believes it has a huge opportunity to grow its non-food business through joint buying and extending its brands into different countries. The company's sales of non-food merchandise rose by 6.2 per cent to £13.1bn, of which a whopping £9bn came from the UK business.

In the UK, Tesco has doubled its sales of electrical goods over the past four years. A similar achievement in its entertainment category has taken just one year, after it revamped its ranges, allocated more space to products and signed exclusive sales deals, such as the Merry Madagascar DVD.

Tesco's clothing business, well-known for its F&F range, now generates sales of more than £1bn a year. The grocer said underlying clothing sales grew by more than 14 per cent in its four central European markets, despite the overall market declining in the region during the recession.

City analysts waxed lyrical about the growth potential for the grocer in overseas markets, notably South Korea and China. Greg Lawless, a European retail analyst at Collins Stewart, said: "South Korea could soon start moving the dial."

Tesco will also open its first cash and carry in India later this year, probably in Bangalore or Mumbai.

South Korea is already Tesco's largest international business, with sales of £4.5bn and profits just shy of £300m, boosted by its acquisition of the Homever chain in May 2008. Sir Terry said yesterday that South Korea was "rapidly becoming a major engine of the group", adding that it had taken Tesco 10 years to achieve in South Korea what its UK operation had taken 60 years to accomplish.

In addition to physical shops, Tesco also has a massive opportunity to grow its retailing services operation, which includes Tesco Bank, Tesco Telecoms and Tesco.com.

Revenues from Tesco.com, including grocery dotcom and its Direct non-food catalogue business, grew by 14 per cent to £2.1bn, making this unit alone bigger than the retailers HMV and WHSmith.

Tesco also believes the worst of the recession is over and is sounding bullish about the year ahead. Sir Terry said: "The recovery has taken hold. UK customers came out of recession in summer of 2009 and these are not moments but long-term trends as world economies recover."