UPDATE 4-Tesco profit up 10 pct, says riding out tough market
(Adds more analyst, company comments, updates shares)
By Mark Potter
LONDON, Sept 30 (Reuters) - Tesco (TSCO.L), Britain's biggest retailer, met forecasts with a 10 percent rise in first-half profit, signalling it can cope with weak markets even as it urged interest rate cuts and steps to steady banks.
Shares in the supermarket group, which serves more than 20 million Britons a week, jumped as much as 5.4 percent in early trading on Tuesday, boosted by a strong showing in international markets, which accounted for about half of the profit growth.
In the UK, sales of own-brand products grew strongly, while previously fast-growing premium and organic ranges, as well as non-food items, suffered as cash-strapped shoppers cut back.
"A robust performance in a tough consumer environment deserves a premium rating, especially in the currently turbulent financial markets," said Credit Suisse analyst Andrew Kasoulis.
Many of the world's retailers are struggling as shoppers curb spending amid higher food and fuel costs, and economic uncertainty exacerbated by the collapse of several major banks.
H&M (HMb.ST), the world's third-biggest clothing retailer missed third-quarter profit forecasts on Tuesday [ID:nLU245413].
Tesco Chief Executive Terry Leahy told Reuters that shoppers were "hard pressed", but trading conditions were not yet as bad as in 1991-2, when interest rates and unemployment were higher.
"Inflation has passed its peak ... and that will leave room for interest rate cuts which I think will be welcomed," he said in a telephone interview.
"Also, though, it's important that we get banks back to doing their job, which is to provide liquidity for the real economy and lending at sensible prices". [ID:nWLA0472]
Tesco, the world's No. 3 retailer behind France's Carrefour (CARR.PA) and U.S. group Wal-Mart (WMT.N), said profit before tax and one-off items was 1.45 billion pounds ($2.62 billion) in the 26 weeks to Aug. 23, on sales up 14 percent to 25.6 billion.
The interim dividend was raised 11.6 percent to 3.57 pence.
Analysts on average expected a profit of 1.43 billion pounds and sales of 25.78 billion, according to a Reuters poll.
At 1230 GMT, Tesco shares were up 3.5 percent at 382.7 pence, off an early high of 390 pence but outperforming a 1.3 percent rise on the DJ Stoxx European Retail Index .SXRP and valuing the business at about 30 billion pounds.
DISCOUNTERS
Tesco, which runs more than 3,700 stores in 13 countries, said first-half growth was driven by a 27 percent rise in international sales, led by continental Europe and Asia and helped by the recent weakening of the pound.
UK sales were up 10 percent, fuelled by strong demand for budget brands. Sales of non-food items rose 4 percent, while organic foods and the premium "Finest" range were at best flat.
UK like-for-like sales excluding fuel, a key industry measure, rose 4.0 percent in the second quarter, up from 3.5 percent in the first and in line with analysts' forecasts.
According to researchers TNS WorldPanel, Tesco has been losing UK market share to rivals more closely associated with low prices, such as Wal-Mart-owned Asda and Morrison (MRW.L), as well as smaller discounters such as Aldi and Lidl.
Morrison, for example, posted an 8.2 percent rise in same-store sales excluding fuel for the quarter ending Aug. 3.
But Tesco, which still has a British market share of over 30 percent, is fighting back with a new low-cost range of products under the banner "Britain's Biggest Discounter," and Leahy said he was confident of regaining any lost customers.
The new products and price cuts were "all budgeted and planned for," Leahy said, playing down suggestions that grocers were on the verge of a price war that might dent profit margins.
NEW MARKETS
Finance Director Andrew Higginson said Tesco's plan, announced two months ago, to offer a full-range of banking services could benefit from current financial market turmoil.
"There are opportunities for a challenger brand to come in," he said, adding that Tesco would look at launching a current account and mortgage products in around a year's time.
Tesco said its new U.S. chain, Fresh & Easy, made a 60-million-pound loss in the first half and sales of 76 million.
Sales densities, a closely-watched industry measure, averaged $11 per square foot per week, which Leahy said was above the industry average of about $8.5. Stores opened since a pause in expansion in the Spring, were averaging closer to $13.
"I think we have it right," Leahy said of the small adjustments made since the pause, such as a warmer in-store atmosphere and the introduction of a small number of promotions. (Additional reporting by Dan Lalor; Editing by Quentin Bryar and Hans Peters)
