Warren Buffett’s Tesco Releases 2012 Full Year Results
The results contained no big surprises with pre-tax profit increasing by 1.6% and underlying diluted earnings per share rising 2.1%. The dividend increased in line with EPS growth to 10.13p to give 14.76p for the year. This equates to a yield of 4.47% at the current market price.
Of course the big news is that Tesco is undertaking a £1bn revamp of its core UK business. This figure includes £400m of capital investment. The money will be spent on store renovations, an increase in staff numbers and to provide a better quality product range.
Currently Tesco are recruiting and training 8,000 new staff in existing stores with around 20,000 new staff to be recruited over the next two years. Tesco is investing more in longer store hours as well as the fresh food sections particularly in the larger stores.
UK like-for-like sales, excluding petrol, are down 0.9% which is a slight improvement from the end of 2011/start of 2012. Total UK sales increased by 6.2% which shows large margin deterioration as trading profit was a negative 1%.The major reason for this fall is a lack of coupon activity over the Christmas period when competitors issued large volumes of cumulative spend coupons. The group consequently sold bargain goods to improve footfall into the stores.
Of concern are the large L-F-L falls and a weakening in performance against industry benchmarks. These concerns have been addressed with a 6 point plan which will be delivered over the next few years.
The 6 point plan includes the following:
1. Service & Staff - more staff for existing stores, initially in fresh food departments
2. Stores & Formats - faster store Refresh programme; introducing warmer look and feel
3. Price & Value -better prices and promotions, more personalised offers
4. Range & Quality - better ranges, starting with re-launching the Tesco brands
5. Brand & Marketing - better, clearer, more relevant communication with customers
6. Clicks & Bricks - Click & Collect roll out, transforming range and online presence
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Asia, Europe & United States
As always Tesco international growth was solid with revenue increasing by 9.5% and international profits rising by 17.7% using actual exchange rates.
Tesco announced that it is winning market share in almost all of its markets and it is making progress in all markets despite economic headwinds. Again like-for-like sales proved more challenging in separate markets with items such as the Thai floods affecting business.
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· These figures are excluding Japan
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*Exc. petrol, exc. Japan Tesco placed 6.9m square feet of new store space during the year up from 5.9m the previous year and 4.8m during 2009/10. 5.8m square feet is planned for the current year with about half of that space planned for smaller outlets.
Online operations are performing well. The company intends to roll out these operations across all markets starting with capital cities. The Prague operation, started in January, is already trading ahead of expectations and Warsaw, Tesco’s second European online operation, will be launched soon. South Korea and Ireland grew their combined online sales by 41% over the year.
Asian trading profits increased by 21.8% at actual rates to £737m. Korea and Malaysia were strong drivers of profit growth.
China is providing challenging trading conditions due to high inflation and wage cost pressures. Tesco has therefore scaled back its expansion plans and will open 16 hypermarkets during the current year.
Tesco floated 17 high quality shopping malls on the Thai Stock Exchange raising £379m.
3.8m square feet of new space will be opened in Asia during the current year and Clubcard continues good growth.
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As can be seen in the table above trading profit only grew by 0.4% during the year. This figure was hampered due to a tough H2 and a £38m Hungarian sales tax during the year without which trading profit growth would have been 7.6%.
2.5m square feet of space was opened during the year with a further 1.8m square.
[ Enlarge Image ]The US operation is one that many investors will be looking at. Breakeven was meant to occur towards the end of 2013 but the results state that breakeven will now be later than Tesco’s earlier guidance. This is due to concentration on per store profitability first before continuing with the expansion scheme. The company did not say when breakeven will occur.Tesco ended 2011/12 with 185 US stores and is likely to end 2012/13 with nearly 230 stores.
The 4th quarter saw the 9th consecutive quarter of like-for-like growth. This growth is driving up profitability per store to the level that Tesco require.
Group General Merchandise, Clothing & Electrical
Non-food continues to be a drag on performance in the core UK market particularly in like-for-like terms. Categories such as toys and sports, particularly online, did see some growth, but general trade remains poor with like-for-like sales being down 3.9% over the year.
Non-food sales in Asia and Europe were stronger than in the UK with clothing sales increasing by 12%, at constant exchange rates, in Central Europe.
Tesco Bank’s new systems and infrastructure is nearly complete after Tesco slowed the migration in order to perfect the system. Tesco announced this morning that a resumption of faster growth is now underway.
Around 75% of the banks business is done online making it one of the UK’s largest online banks. The 13.6% revenue growth figure, in the table above, received a boost from the insurance division which was streamlined towards the end of 2011.
Tesco Bank's overall capital position improved once again from an already good position, with the risk asset ratio improving by 240 basis points to 16.0%. The core Tier 1 ratio remains strong at 15.3% (last year 15.9%).
Warren Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) owns 5.08% of Tesco Plc according to the latest filings. However as he sometimes does with the NYSE he might have asked the LSE for non-disclosure as he builds his stake. We will have to wait and see.