SUPERMARKET giant Tesco will this week set out plans to retreat from its ill-fated foray into the United States as it prepares to book a £1 billion write-down on the value of its American business.
Chief executive Philip Clarke is said to be ready to jettison Fresh & Easy, which has racked up losses of £850 million since its launch in California five years ago.
Tesco has been sounding out potential buyers for the operation, though a deal is unlikely to be finalised in time for Wednesday’s full-year results’ announcement.
The US arm of Aldi and speciality grocer Trader Joe’s are among those thought to be interested in at least part of the Fresh & Easy operation.
Tesco’s profits are set to tumble regardless of the financial hit from the US as it carries the cost of a £1bn programme to revive its core UK operation after a profit warning in January last year.
The consensus forecast is for a 10.6 per cent drop in pre-tax profits to £3.5bn, down from £3.9bn previously.
Clive Black, retail analyst with Shore Capital, is predicting an even steeper decline of 14 per cent.
Given the complexity of the US operation – which includes nearly 200 stores, three factories and a major distribution centre – Black believes it will take some time to organise a disposal.
“What we do expect is for Tesco to bite the bullet in terms of carrying the cost of Fresh & Easy, and to go ahead and write that down,” Black said.
Shore Capital has estimated that it could cost Tesco £250m to exit the US, although the figure could be as high as £500m, factoring in costs such as redundancies at its Los Angeles head office.
The broker described such a figure as a “body blow to the balance sheet but an onward boost to earnings-per-share”, with analysts predicting that the company’s balance sheet could withstand the cost, which would also eliminate the “drag” that the struggling American subsidiary has had on the stock.
Tesco’s booming international business, which previously masked sluggish UK sales, is expected to slow as key markets in Europe and Asia have come under pressure.
Meanwhile, investors will also closely inspect the main domestic operation for signs that recovery efforts are taking hold.
One major issue is how the group overhauls its massive Tesco Extra stores to meet changing consumer demands in an increasingly internet-driven sales environment.
Clarke wants to turn Tesco’s big boxes into “retail destinations” akin to a shopping centre, with dining and relaxation at their core.
To that end, the company has embarked on an acquisition spree that has seen it take control of the Giraffe restaurant brand, the Euphorium bakery chain and other leisure venues in recent months.
Looking further ahead, Black believes Tesco Bank could begin reaping rewards for shareholders once it launches a current account to cement its existing offering of insurance, credit card, loan and savings products.
The group’s financial arm – which is headquartered in Edinburgh and has a customer service operation in Glasgow – has held back on current accounts pending new rules later this year that will make it easier for customers to switch banks.
This has been seen as a barrier to new entrants, though the Post Office announced plans last week to begin offering current accounts.
“It should be Tesco Bank’s time,” Black said. “The big clearing banks have got a rotten reputation with just about anyone who has an interest in them, so the time is right for new entrants.”