April 20, 2010 / 6:42 AM / 10 years ago

UPDATE 3-Tesco says recovery takes hold, steps up growth

* Underlying profit 3.4 bln stg vs forecast 3.38 bln

* Sales ex VAT 56.9 bln stg vs forecast 58.4 bln

* UK H2 sales growth slower than H1

* Raises capex to 3.5 bln stg, to create 16,000 jobs

* Shares down 0.6 pct, underperform European peers (Adds more analyst comment, background, shares)

By Mark Potter and Paul Hoskins

LONDON, April 20 (Reuters) - Tesco (TSCO.L), the world’s No.4 retailer, said the global economic recovery has taken hold and sees little risk of a dip back into recession in its main British market despite a slowdown in recent sales growth.

The group, which runs over 4,300 stores across 14 countries, met forecasts on Tuesday with an 8.7 percent rise in annual profit, boosted by acquisitions in Asia and financial services, and said it is stepping up expansion plans in the year ahead.

Capital spending will rise to 3.5 billion pounds ($5.4 billion) from 3.1 billion in the year just ended, with the group creating about 16,000 jobs and opening around 11 million square feet of new selling space, up from 7.1 million in 2009-10.

About 80 percent of this will be abroad, much of it in Asia.

“The recovery has taken hold — strongly on a worldwide basis, which is good for Tesco, and slower but steady in the UK. There won’t be a double dip (recession),” Chief Executive Terry Leahy told Reuters in an interview. [ID:nWLB2903]

Profit before tax and one-off items was 3.4 billion pounds ($5.5 billion) in the year ended Feb. 27, helped by the first full-year contributions from the group’s purchase of the Homever chain in South Korea and full ownership of Tesco Bank.

That figure was up 10.1 percent versus the previous 52 weeks and 8.7 percent on a 53-week basis, and just above analysts’ average forecast of 3.38 billion in a Reuters poll.

But earnings were boosted by 377 million pounds of profits from property deals, which some analysts said was higher than they had expected.

Others also noted a sharp slowdown in UK sales growth towards the end of the financial year and that the group did not give figures for recent weeks, as it did last year.

“A decent outcome (but with) caveats,” said Arden Partners analyst Nick Bubb of the results.

At 0806 GMT, Tesco shares were down 0.6 percent at 434.75 pence, compared with a flat STOXX 600 European retail index .SXRP.

UK TOUGHER

Tesco’s performance compares well with European rivals France’s Carrefour (CARR.PA) and Germany’s Metro MEOG.DE, both of which posted a drop in 2009 profits, hit by falling food prices and sluggish consumer demand in continental Europe.

British retailers have tended to fare better.

Associated British Foods (ABF.L) said on Tuesday its Primark fashion chain powered a steep rise in first-half profit, while British luxury fashion group Burberry (BRBY.L) said it would beat full-year profit forecasts. [ID:nLDE63I14V] [ID:nLDE63I14V]

But many UK retailers fear consumer spending could slow after May 6 elections as a new government takes steps, like hiking taxes, to bring down borrowing.

Grocers are also suffering from a drop in food price inflation. Asda (WMT.N), Britain’s No.2 grocer behind Tesco, said on Thursday the market had slowed sharply. [ID:nLDE63E15S]

Tesco, which makes about 70 percent of its profits in Britain, said sales at UK stores open at least one year rose 2.7 percent excluding fuel and VAT sales tax in its fiscal second half, down from 3.7 percent in the first half.

JP Morgan Cazenove analysts said this implied growth of 0.6 percent in the final seven weeks, after a strong Christmas.

CEO Leahy said Tesco was outperforming the broader UK market and saw a gentle rise in inflation in the months ahead.

Tesco said underlying sales overseas were turning positive and losses in its recession-hit U.S. business had peaked, although it was still unable to say when it might break even.

The group cut net debt to 7.9 billion pounds, ahead of an expected decline to about 8.5 billion, and lifted the full-year dividend 9.1 percent to 13.05 pence a share.

Leahy said Tesco had not suffered much from the recent disruption to international air travel, as less than 1 percent of its products were brought in by air. The group was arranging to pick up flowers from Kenya in Spain, he said. ($1=.6233 Pound) (Editing by Karen Foster; Editing by Erica Billingham)

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