Grocery behemoth Tesco (TSCO) has tumbled 2.8% to 374p as investors digested grim annual numbers from the UK's biggest supermarket operator. Sentiment has soured as Tesco confirms the massive cost of exiting the US market and surprised the market with news of an £800 million UK property asset write-down.


Figures for the year ended 23 February reveal a 13% drop in group trading profits to £3.45 billion, 2.2% below consensus and representing the FTSE 100 firm's first annual profits drop for almost 20 years. 'Statutory' profits are worse still, slumping 51.5% to £1.96 billion, pegged back by one-offs including a surprise £804 million write-down for UK property following a review of the retail titan's real estate pipeline.


Analysts continue to be divided on the stock. Espirito Santo has a 'sell' rating. It says: 'We think Tesco’s strategy of transforming itself into a multi-channel retailer is the right one, but the transition process away from being a hypermarket led retailer will be painful and probably less profitable, both in the UK and internationally.'


Panmure Gordon is bullish with a 'buy rating' and 440p price target. It says: 'The decision to exit the US is not unexpected and the main focus of these results will therefore be upon the shift in strategy to focus on generating positive free cash flow. We think that this will be taken well by the market, especially as it signals the end of the space race in the UK.'


Shore Capital has reiterated its 'buy' recommendation to clients following the update, although the broker has marginally downgraded its 2013/14 profit forecast from £3.37 billion to £3.32 billion, 'largely to reflect the lower than expected European base and discontinued US operation.'


Tesco has identified more than 100 sites, the bulk bought at the top of the market, which it no longer plans to develop. Instead of continuing the supermarket 'space race', Tesco is honing its focus and targeting spend on reinvigorating its UK business, pursuing 'disciplined international growth' and investing in multi-channel initiatives.


As expected, Tesco today confirmed its exit from the US, where its loss-making Fresh & Easy chain will close. Tesco is taking a £1 billion non-cash write down for the 199-strong chain, which lost a worse than expected £200 million before tax last year. The £30.9 billion cap has treated the US chain as a discontinued operation in its results, as it has also done with its Japan operations which were exited in January.


Profits disappointment at Tesco, which issued a shock profits warning last year (12 Jan 2012), largely reflected hefty reinvestment in its core, yet neglected, UK business. In addition, the retailer felt the effects of tough trading in Central Europe, where unemployment, high inflation and austerity measures dampened performance. Another trouble spot was South Korea, its biggest international market, where regulatory restrictions on opening hours hit Asian returns.


In a statement, chief executive officer Philip Clarke says: 'We have set the business on the right track to deliver realistic, sustainable and attractive returns and long-term growth for shareholders. The consequences are non-cash write-offs relating to the United States, from which we today confirm our decision to exit, and for UK property investments which we will not pursue because of our fundamentally different approach to space.'


The grocer opened a significantly smaller amount of net new space last year and in the forthcoming year it will look to open a larger proportion of convenience stores.


Last year, the group's online sales grew 13% to top £3 billion for the first time, with the UK online grocery business growing sales 12.8% to £2.3 billion, ahead of the wider market.


Operations appear to be slowly getting back on track in the UK, where Clarke's plan to 'Build a Better Tesco' delivered an improved performance in a tough market. Food continues to do better than non-food, yet with the help of investment in service and staff, refreshing stores and pricing and product range improvements, total UK sales increased by 1.8% to a shade over £48 billion. Hefty spend caused profits to fall 8.3% to £2.27 billion.


UK like-for-like sales, excluding petrol, fell 0.3% last year. Encouragingly, Tesco, which recently acquired the Giraffe restaurant chain in a move designed to make better use of floor space and improve store footfall, delivered its strongest level of like-for-like sales growth for three years in the fourth quarter, despite taking the brunt of consumer reaction to the horsemeat scandal which broke in January.

Issue Date: 17 Apr 2013