Tesco Preliminary Results 2010 - 2011.

Tesco's preliminary results for the year ending Feb 2011 were published yesterday and significantly gave us an introduction to the new Chief Executive Philip Clarke who has succeeded Sir Terry Leahy.

Headline statements read as follows:

- Group sales up 8.1% to £67.6bn

- 12.3% rise in underlying profit before tax to £3.8bn

- Group return on capital employed (ROCE) increased to 12.9% (last year 12.1%)

- 7.8% growth in Group trading profit to £3.7bn, including 30% growth in Asia

- Dividend per share growth of 10.8%

- Net debt reduced to £6.8bn by year-end, ahead of plan

In his opening statements the new boss has clearly determined that the UK has lost momentum but outlined a management restructure of the business with new objectives and an increased focus on the UK:

"We have equipped the business for global growth with new management structures and teams -including an experienced UK Board, which is bringing more focus and energy to our largest business. Asia and Europe made excellent progress contributing nearly 70% of our profit growth in the year. The momentum in the USA is building but still has some way to go."

 New management structures in place and increased focus on UK core business:

·       New global Executive Committee in place, combining key business areas and support functions

·       Six immediate team objectives set - around performance, growth and returns

·       Dedicated, experienced UK Board appointed and operational

·       Plans to align senior management remuneration with growth and ROCE improvement

We have set some immediate objectives for the Tesco team:

·       First, keeping the UK strong and growing.

·       Second, we want to be outstanding internationally, not just successful.

·       Third, as the combination of stores and online becomes compelling for customers, we aim tobecome a multi-channel retailer wherever we trade.

·       Fourth, we will deliver on the potential of Retailing Services - of which the Bank is a big part.

·       Fifth, by applying Group skill and scale we will give our customers even more value and increase the competitive advantage to our businesses.

·       Sixth, deliver higher return on capital employed for shareholders.

(extract from Tesco Preliminary results for 2010 - 2011)

So, profits are up and have continued this trend despite the last few years of global turmoil which underlines my view that supermarkets are in an enviable position of delivering essentials that we all need/want.

I have extended this further to a view that they are also in a position to manage cost pressures better as, despite the current price wars, hasn't your weekly shop gone up in price (or down in quantity), as price increases are passed on (earlier post: Looking Ahead to 2011.).

Significantly, the success of supermarkets is also based upon efficient management of stock and inventory so, if the majority are buying less then they also will be buying and storing less (and they store very little) but this would still impact profits so it is also pleasing to see that UK sales have been maintained and trading profit increased slightly (with fuel sales stripped out). 

They also have a significant advantage to cashflow over most industries as they are often paid for goods before they have paid out for them.

It isn't altogether surprising that UK sales are flat. As discussed in an earlier post: Supermarket Sweep: Tesco; Morrisons; or Sainsburys?, I would be more than happy for that to be maintained given the state of the economy and the resurgent competition from Morrisons and Sainsburys over the last few years.

The fact that Morrisons and Sainsbury are growing their market share and Tesco has managed to maintain their market share goes some way to explaining the price war instigated by ASDA with its price check campaign. Of course it is beneficial for the consumer but also highlights some of the reasons why Walmart has not taken the UK by storm with its lack of creative marketing.

Elsewhere, sales in Europe, Asia and the US were up with significant jumps in Asia and the US. Although, the US still recorded a loss and is not now forecast to break-even until 2012/13 (4 years behind plan). 

Also in Asia, the company has announced a scaling back of its mall roll-out in China with 50 now planned in the next 5 years (down from 80). As for Japan, Tesco has decided not to invest further "unless it can "see a way of winning" in the country." (www.telegraph.co.uk: Tesco's UK stores have lost momentum says new chief executive Phil Clarke).

Tesco Bank achieved profits of £264m (+5.6%), on revenues of £919m (+6.9%).

So, no real surprises on UK growth, and confirmation that overseas growth is where the majority of Tesco's growth will come from. Also a couple of negatives in the slower roll-out of stores into China but that doesn't prevent them from continuing to grow beyond the five years or even to revise plans should conditions change.

One of the numbers I had identified in my previous analysis of Tesco was cash at hand and in bank which last year stood at £2.819bn but has now reduced to £1.870bn in these results. 

Still a chunky amount of money though and the reduction can be explained by the paying down of debt to £6.79bn from £7.929bn. 

This has resulted in net gearing of 55.67%, down from 71.62%.

And, as it has been directly used to pay off debt there is no difference to the company's overall health other than the benefit of reducing interest payments going forward.

Interesting to see the statement on senior management remuneration being linked to ROCE and the affirmation of the company's target to achieve 14.6% by 2015. This seems much more comprehensive than the usual earnings per share targets which can often be achieved for the short term at the expense of margins and efficiencies. 

Senior management often forget that they have legal responsibilities to act as stewards of the business on behalf of shareholders' and this in turn results in senior management remuneration being at the expense of shareholder value, incentivising personal gain over the business's gain, as the underlying business deteriorates.  

But, "You get what you measure" is the statement that comes to mind and as, simplistically, Return On Capital Employed is the return generated by the amount of money invested in a business then, of course, the higher the (ongoing) percentage return the better it is for all stakeholders in the business (employees, management, and investors).

And, earnings per share growth should still result.
So could be a good thing and one I would like to see catch on elsewhere.

Other than that, Philip Clarke may have just instigated his own personal strategy to engage all with his open, amiable manner and might just be a positive new face for Tesco. 

Maybe not quite as hands on, and in the trenches as the Sainsbury boss, Justin King, likes to present himself, but he is does seem like a refreshing change from the slightly dour manner of his predecessor.

Won't be clear for some time yet whether Philip Clarke is mixing things up or just re-energising and refining the existing formula. My hope is for the latter particularly as he is a Tesco man and hand picked by Sir Terry.

I notice that the shares fell 6.5p on the back of the results (but have recovered some of that today), which I think more to do with Philip Clarke's recognition of flat UK growth. I also think that this has been suspected for the last few quarters and am happy that the company appears to be taking steps to addressing this rather than ignoring it so am viewing this as a positive rather than a negative.
It still remains to be seen how they manage this year with inflation rife and consumer spending impacted but, as discussed in my earlier post: Supermarket Sweep: Tesco; Morrisons; or Sainsburys?, I think that they have the strategic nous and financial strength to come through the next 12 months stronger than their competitors.

So with a convincing overseas growth story and potentially renewed focus on the UK, I am comfortable with Tesco's place in the portfolio and look forward to continuing growth in the dividend.

Tesco@ 397p, +3.45p (+0.88%) as at 12pm

- 10.09p dividend payable 8 July (ex dividend 1 May 11)