Overseas woes take shine off Tesco’s turnaround

Tesco has insisted that its turnaround efforts are bearing fruit with an improved performance in the UK, but tough conditions overseas sliced almost a quarter off its first-half profits.

Tough conditions in Europe have hit Tesco's profits. Picture: PA

With earnings from its European division tumbling by more than two-thirds, the UK’s largest grocer also said its 134 loss-making Chinese stores will be swallowed by state-controlled China Resources Enterprise (CRE).

Under the deal, Tesco will pay about £345 million to take a 20 per cent stake in a joint venture with CRE, which operates almost 3,000 stores across China and Hong Kong under the Vanguard brand. The tie-up, expected to be completed in the first half of next year, will create a combined business with sales approaching £10 billion.

Chief executive Philip Clarke said: “Through this deal we have a strong platform in one of the world’s most exciting markets and it will move us more quickly to profitability in China.”

Having already admitted defeat in Japan and the US, the joint venture with CRE marks another retrenchment in Tesco’s overseas ambitions.

But Shore Capital analyst Clive Black said: “We believe it is better to have 20 per cent of something rather than 100 per cent of a business that had it all to prove.”

Overall pre-tax profits for the group dropped to £1.4bn for the six months to 24 August, down 24.5 per cent on a year earlier when currency fluctuations are stripped out, on total sales 0.5 per cent higher at £35.6bn. The interim dividend, to be paid on 20 December, was held at 4.63p a share.

Tesco – which last year unveiled a £1bn turnaround programme in the UK to revamp stores, add staff and refresh its food offering – insisted its domestic operation was “strengthening”.

However, shares dipped 1.1p to close at 358p.

Trading profits in the UK rose 1.5 per cent to £1.1bn, with like-for-like sales excluding petrol remaining flat in the second quarter, having fallen 1 per cent in the previous three months.

“Online grocery sales were up almost 13 per cent.

Clarke said: “Our performance in the UK has strengthened through the half, particularly in our food business, as we have continued our work to build a better Tesco.”

Richard Hunter, head of equities at Hargreaves Lansdown, said there was scope for more growth in the UK as the overhaul continues, adding: “Tesco is spinning the strategic plates and is showing some early signs of success.

But international trading profits – excluding China and the firm’s US chain Fresh & Easy, the bulk of which has been sold to investment company Yucaipa – tumbled 27.6 per cent to £369 million. Cantor analyst Mike Dennis said the fall was mainly due to a “very poor” performance in Europe, where profits plunged 67.8 per cent to £55m.

With the impact of one-off costs and lower profits on property sales stripped out, underlying group pre-tax profits fell 8.4 per cent to £1.5bn on a constant currency basis.

Pre-tax profits at Tesco Bank, its Edinburgh-based financial services arm, dipped to £104.7m for the six months to the end of August, from £105.3m a year earlier, following the severing of a link with insurer Direct Line.

The bank, which employs more than 3,000 people in Edinburgh, Glasgow and Newcastle, said bad debts fell more than a third to £28m, despite lending to customers rising by a similar proportion to almost £5.6bn.ARETH MACKIE