* Launches review of Fresh & Easy chain
* CEO says "likely but not certain" firm will exit U.S.
* UK Q3 lfl sales down 0.6 pct ex fuel and VAT sales tax
* CEO says UK non-food performance "not good enough"
* Shares up 3 pct
(Adds detail, CEO, analyst, investor comment, updates shares)
By James Davey
LONDON, Dec 5 Tesco Plc is set to end
its five-year attempt to crack the cut-throat U.S. market and
will focus on turning around its struggling home business and on
faster-growing emerging markets.
The world's third-biggest retailer said it was reviewing its
loss-making U.S. unit Fresh & Easy that could lead to the sale
or closure of the 200-store chain that employs 5,000.
"It just became clear to us that the journey to sustainable
returns was going to take too long," Phil Clarke, chief
executive of the British company, told reporters.
"It's likely but not certain that our presence in America
will come to an end," said Clarke, speaking from Los Angeles.
Clarke, CEO since March 2011 and a Tesco lifer who as a
youth stacked shelves in his local store, said finding a
solution to Fresh & Easy would allow the group to divert
resources in more profitable markets.
Some analysts believe the move could represent a fundamental
shift in Tesco's thinking.
"The decision on the U.S. is but a first step. We expect
Tesco to significantly reduce capital expenditure and focus on
cash generation and increasing return on capital employed," said
analyst Philip Dorgan at brokerage Panmure Gordon.
Tesco shares, down 20 percent over the last year, were up 3
percent at 337 pence by 1249 GMT.
Announcing the review alongside a third-quarter trading
update that showed continued pressure in Tesco's core UK market,
the group said it would report the review's findings when it
publishes full-year results in April.
Tesco, which trails France's Carrefour and U.S.
leader Wal-Mart by annual sales, said it had received a
number of approaches from parties interested in acquiring all or
part of Fresh & Easy, or in partnering with the firm.
Tesco added that Tim Mason, Fresh & Easy's CEO and deputy
group CEO, is leaving Tesco after 30 years with the firm.
Investment bank Greenhill will assist with the review.
Having absorbed nearly 1 billion pounds ($1.6 billion) of
capital since its 2007 launch when Tesco was run by Clarke's
predecessor Terry Leahy, Fresh & Easy has failed to make a
profit in a market where it competes with the likes of Trader
Joe's and Whole Foods Market as well as Wal-Mart.
Clarke has been under increasing pressure from investors to
take decisive action and an easing of Fresh & Easy's
third-quarter underlying sales growth to 1.8 percent from 6.9
percent in Q2 may have been the final straw.
Charles Heenan, investment director at fund firm Kennox, who
has Tesco as his third-largest holding, welcomed the review. "It
would be lovely if they could sell it and make lots of money but
I don't think that is likely to happen. I would prefer them to
leave completely but if the best they can do is structure some
sort of partnership, that's not a disaster," he said.
He added that Tesco should focus on sorting out the UK,
where it posted a return to falling quarterly underlying sales,
raising questions over whether Clarke's 1 billion pound recovery
plan is struggling to make an impact.
Tesco's sales at UK stores open over a year, excluding fuel
and VAT sales tax, were down 0.6 percent in the 13 weeks to Nov.
24. That compared with forecasts in a range of down 0.9 percent
to up 0.2 percent and with a 0.1 percent increase in the prior
quarter, which was its first rise after 18 months of decline.
Clarke said like-for-like sales in food, the main focus of
his recovery programme, grew 1.2 percent, ahead of the market
overall, but conceded a further reduction in underlying sales of
non-food categories "was not good enough".
Tesco, which stunned investors in January with its first
profit warning in more than 20 years, is battling to regain
momentum against a weak UK economy, with consumers fretting over
job security and a squeeze on incomes. The firm has suffered
more than rivals, in part because it sells more discretionary
non-food goods on which shoppers have been cutting back most.
In April Tesco launched a strategy to revive UK sales,
investing in more staff, revamped food ranges, smartened stores
that give more space to food and refined marketing.
Rivals Asda (part of Wal-Mart) and J Sainsbury Plc
have both recently reported sales increases and the only major
domestic rival to have reported a decline was No. 4 player Wm
Morrison, albeit for different trading periods.
Tesco's woes are not confined to the UK and United States.
In South Korea, its biggest overseas market, underlying
sales fell 5.1 percent as legislation allowing local governments
to impose shorter trading hours hurt trading, while in eastern
Europe underlying sales were down 3.6 percent, reflecting
fallout from continued euro zone instability.
($1 = 0.6209 British pounds)
(Additional reporting by Sinead Cruise; Editing by Kate Holton
and David Holmes)