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.