TEXT-Fitch: Tesco's U.S. exit would end losses, allow UK turnaround focus
Dec 5 - A withdrawal from the US would benefit Tesco's financial profile by halting several more years of operating losses and would allow the retailer to focus on addressing more pressing issues in its home market, Fitch Ratings says. Early expectations for growth from the US business quickly proved over-optimistic, especially as it was launched just before the economic downturn. Still a withdrawal would leave the group's European and Asian operations as the only source of international diversification. Tesco had set a target for its US Fresh & Easy arm of making a profit by 2014, but our latest projection didn't envisage profitability for the business until 2016 at the earliest. It made a cumulative loss of GBP782m since its first store was opened in November 2007, with cumulative capex of GBP1.2bn as of the first half of 2012. For a relatively small part of the group's business, Fresh & Easy had also taken up a significant amount of capital and management time. A sale or closure of the division would remove distractions from what we see as the biggest immediate threat to the group's credit profile and rating - the continuing drop in like-for-like sales, market share and margin at its core UK business. The group's UK performance led us to change Tesco's Outlook to Negative from Stable in June. Among other factors we said a decline in its UK trading margin to below 5% would put pressure on the group's 'A-'rating, while a sustained recovery to around 5.5% could stabilise the Outlook. We do not, however, believe Tesco can reverse the rise of competitors such as Sainsbury, given the structural changes in the UK market and the weak economic environment. The group's international operations will therefore become an increasingly important side of the business. When launched, the US expansion was the highest risk part of Tesco's international expansion, but also had the most upside potential. Tesco initially suggested it could eventually grow to be as large as the UK operations. Tesco's failure to crack the US market therefore puts more pressure on ensuring successful growth in its European and Asian operations. The group has been more successful in expanding in these markets, taking a more conservative approach by forming local partnerships and rolling out new stores organically. Tesco has announced a strategic review of its Fresh & Easy business, but has not made a final decision on its future. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.