US business will make money in three years, Tesco predicts

(BLOOMBERG)

Tesco launched a vigorous defence of the performance of its Fresh & Easy business in the US yesterday as the grocery giant posted a strong rise in half-year profits to £1.6bn.

The 12.5 per cent rise in pre-tax profits for the 26 weeks to 28 August was driven by strong international sales, particularly in Asia, and robust growth at Tesco Bank, although underlying sales at its core UK supermarket chain remained subdued.

Despite admitting it was "mothballing" 13 Fresh & Easy stores and that it would not make a profit until 2012/13, Tesco revealed that underlying sales grew by 9.6 per cent in the US and that it will step up its roll-out of new stores to two a week.

Sir Terry Leahy, outgoing chief executive, said: "The [Fresh & Easy] model is right and it will make us money in the US – that is why we are accelerating our opening programme."

Fresh & Easy, which has 168 stores, made a loss of £95m for the half-year to 28 August, which it attributed to acquiring two of its suppliers in the US. But it said that full-year losses have "plateaued" and would not be materially different to last year's £165m deficit.

Sir Terry – who hands over the chief executive reins to Phil Clarke, its international and IT director, in March – said that Tesco had originally planned that Fresh & Easy, which opened its first store in November 2007, would break even in its "third to fourth year of operations [so] around 2011". But Tesco now expects this to happen two years later, when it hits around 400 stores in the US.

The break-even timeframe in the US caught many in the City off guard. Clive Black, analyst at Shore Capital, described it as a "big surprise" and said it was "three years ahead of our expectations". He added: "This is a material development and one that could significantly swing sentiment for the group."

Tesco opened Fresh & Easy in southern California, Nevada's Las Vegas and Arizona's Phoenix just ahead of a brutal recession emerging in the US.

The world's third-largest grocer said the scale of the residential and commercial property crash in a few locations had been "so severe" that Fresh & Easy would mothball about 13 stores. While this is one of the first mothballing exercises Tesco has ever done, Sir Terry said: "The expected population growth has simply not materialised and we'll reopen these stores when the housing and employment markets pick up."

Tesco's group sales, including VAT, jumped by 8.3 per cent to £32.91bn. The star performer in Asia was its Homeplus chain in South Korea, whereprofits rose 52 per cent, as total sales gained 23.3 per cent.

Tesco also described its performance in Thailand as "excellent".

In the UK, which accounts for more than 70 per cent of group trading profit, total sales rose by a more "subdued" 5.9 per cent to £21.87bn. While Tesco's closely watched UK like-for-like sales, excluding fuel and VAT, improved to be up by 0.4 per cent in the second quarter, Sainsbury's is expected to unveil growth of 2 per cent in its latest quarter today.

Despite hikes in petrol prices hitting family budgets by £20 a month, Tesco expects its UK sales growth to pick up in the second half and shrugged off the Government's austerity measures, to be unveiled this month. Laurie McIlwee, Tesco's group finance director, said: "I feel the economy is strong enough. They are necessary measures and our business will grow through it."

Tesco Bank delivered sales growth of 9.1 per cent in the second quarter.

The grocer said it anticipated launching mortgages in the first half of next year, followed by current accounts in the second half.

Tesco raised its interim dividend by 12.3 per cent to 4.37p.

Life after Tesco – Sir Terry keeps the world guessing on his plans

Sir Terry Leahy was giving little away yesterday about his plans after he steps down as Tesco's chief executive in March.

While Sir Terry did not go much beyond his previous comments that he will focus on"private investment" and charitable work, he is adamant he will not takeon a string of FTSE non-executive directorships or chairman roles. He said: "I would not enjoy it", adding: "I don't think I would be good at it."

However, Sir Terry, who has been Tesco's chief executive since 1997, did not rule out board-level work at a private equity firm. "It is possible," he said.

He was more unequivocal that once he leaves Tesco next year he won't be hanging around as a consultant or to offer advice to his successor, Phil Clarke. Sir Terry said: "You do a job. It is a fantastic job and then it has gone. The worst thing you can do is to live in the past."

Meanwhile, asked if Tesco was committed to its final salary pension scheme, he said it was, and quipped: "The older I get, the more committed to it I become."