Downturn finally easing, says Tesco the record beater

UK's biggest grocer posts £3.1bn profit despite US woes

Sir Terry Leahy, the chief executive of Tesco, yesterday joined the growing chorus of business leaders signalling that the worst of the UK economic downturn may be over, while confessing to "regretting" launching his US operation in November 2007 just prior to a severe downturn.

His comments came as the world's third-largest grocer posted record profits for a UK retailer, up by 8.8 per cent to £3.1bn. Tesco's sales rose 13.5 per cent to £59.4bn for the year to 28 February, driven by strong international sales and booming retailing services, such as financial services.

On the UK economy, Sir Terry backed the CBI, the business group which on Monday said the first quarter would mark the worst of the recession. "There are signs of things bottoming out," he said. "Customer spending is holding up reasonably well and a number of people have more spending power in their weekly budget." In the UK, Tesco's core business grew its total sales by 9.5 per cent to £41.5bn over the year, but its like-for-like sales growth, excluding fuel, of 3 per cent over the year trailed its big three UK grocery rivals, Asda, Morrisons and Sainsbury's.

David McCarthy, the consumer analyst at Hobart Capital Markets, said: "Tesco has lost price position and price perception and you cannot kid the consumer."

Sir Terry said that Tesco's launch of hundreds of Discounter products in September and lower inflation than rival grocers were the two key factors behind the more modest sales growth. For the first six weeks of its financial year, Tesco delivered improved UK like-for-like sales, excluding fuel, growth of 3.4 per cent.

Having addressed the threat from the discounters, including Aldi and Lidl, Tesco is to fight back against its big three rivals and other mainstream grocery chains by relaunching its ClubCard around the first May bank holiday weekend with a "substantial investment behind it", said Sir Terry, though he declined to reveal the size of the investment.

Tesco's international business delivered barnstorming sales, up by 30.6 per cent at actual exchange rates to £17.9bn and by 13.6 per cent at constant exchange rates. Its overseas arm contributed £709m to group trading profit over the year.

But Tesco posted a trading loss of £142m – hit by the depreciating pound but higher than the forecast £100m – at its fledgling Fresh & Easy operation, which has 115 stores in the US. It has been hit by the tanking economies in Las Vegas, Phoenix and Southern California, and has slowed down store openings to just one or two a week.

Mr Leahy said that customers had responded well to the changes Tesco had made, such as with more branded ranges, price promotions and a warmer look to the Fresh & Easy stores. Sir Terry said he had "no regrets about the strategy, but regrets about opening in a recession". But Mr McCarthy said: "In the US, it looks like the operating model is delivering losses at an individual store level. The more they open the more they lose, and that is very un-Tesco-like."

Tesco Personal Finance posted a pre-tax profit of £212m, excluding a £32m charge for amortisation of assets. The grocer said customers had opened 100,000 savings accounts in 2009.

Yesterday, shares in Tesco rose by 16.2p, or 4.88 per cent, to 348.3p, as investors were reassured on its growth strategy and that net debt of £9.6bn was not higher.

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