By James Davey
LONDON (Reuters) – Tesco <TSCO.L>, Britain’s biggest retailer, missed first-half profit forecasts on Wednesday after weak trading in Thailand and Poland took the shine off accelerating sales growth in its main UK business, sending its shares lower.
The company, which acquired wholesaler Booker in March, reported operating profit before one-off items of 933 million pounds ($1.21 billion) – a 24 percent increase on the same period last year but short of the 978 million pounds analysts had expected.
Shares in Tesco, up 12 percent this year prior to the update, fell 7.3 percent by 0830 GMT.
The profit shortfall was explained by a 29.1 percent decline in profit in Asia and a 3.3 percent reduction in central Europe, which partly offset growth of 47.6 percent in the UK and Ireland as Tesco seeks to fight off intense competition.
“I don’t think the market had fully factored in the Asian side (of the business) but we’re really encouraged by the UK,” Chief Financial Officer Alan Stewart told reporters.
Chief Executive Dave Lewis has been rebuilding Tesco since 2014, when an accounting scandal capped a dramatic downturn in trading.
Tesco currently has a leading 27.4 percent share of Britain’s grocery market, according to industry data, although it could be overtaken by Sainsbury’s <SBRY.L> proposed 7.3 billion pound takeover of Walmart’s <WMT.N> Asda.
The tie-up between Tesco’s two nearest competitors, which the competition regulator is probing, is driven in part by the rise of discounters Aldi and Lidl, who are gaining ground on Britain’s big four grocers, as well as the growth of Amazon.
In Asia second quarter like-for-like sales fell 4.8 percent, which reflects Tesco’s decision to exit non-profitable cash and carry sales in Thailand. Underlying sales in the Central Europe division fell 2.0 percent, reflecting weak sales in Poland.
Lewis said Tesco was committed to both Thailand and Poland.
“In Thailand we’re market leader, it’s still the most profitable part of the group and there’s still significant growth to be had,” he said.
Tesco was suffering in Poland because of restrictions on Sunday trading.
“We’ve lost a number of trading days again in the quarter and that just requires us to keep constantly improving the efficiency and productivity of that business in what is quite a challenging market,” said Lewis.
He said the difficulties in Thailand and Poland did not imperil Tesco’s key margin target for the group to earn between 3.5 and 4 pence of operating profit for every pound customers spend by the end of its 2019-20 financial year.
Tesco was “firmly on track” to hit that target as well as cost savings of 1.5 billion pounds and the generation of 9 billion pounds of retail cash.
Analysts at Barclays said that was “an important reiteration given that the delivery date is only 18 months away.”
They maintained their “overweight” stance but cut their full 2018-19 year operating profit forecast for Tesco by about 3 percent to 2.06 billion pounds and their forecast for the following year by 2 percent.
STRONG UK SUMMER
Tesco held its own in a strong summer for Britain’s overall grocery industry which was boosted by record hot weather, a royal wedding and the soccer World Cup, delivering a 2.5 percent increase in second quarter like-for-like sales – an eleventh straight quarter of growth.
Lewis has lowered Tesco’s prices versus all its major competitors, streamlined product ranges and improved their quality, while raising store standards and transforming supplier relationships.
Lewis, who joined shortly before the accounting scandal was uncovered, has also secured new avenues of growth, with the acquisition of Booker his boldest move yet.
In July he agreed to form a global purchasing alliance with France’s Carrefour <CARR.PA>, while last month he launched Tesco’s new discount format Jack’s.
Lewis said the first two Jack’s stores were “trading really well”.
(Additional reporting by Paul Sandle; Editing by Kate Holton/Keith Weir)