A 7.4% drop in half-year underlying pre-tax profit to £1.47 billion from Tesco (TSCO) paints a gloomy picture of the supermarket giant. A weak performance in mainland Europe is to blame.


Statutory pre-tax profit fell 23.5% to £1.39 billion. The news troubles the market, sending the share price down 3.2% to 347.68p.


We wouldn't be surprised to see further weakness over the coming days as Tesco joins the growing ranks of companies pinning their hopes on a stronger second-half period. Any stock in this situation becomes higher risk. Failure to achieve the uplift in sales and profit would naturally lead to earnings downgrades.


TSCO - Comparison Line Chart (Actual Values)


Cantor analyst Mike Dennis says Tesco's second-half period 'could very much depend on a positive UK like-for-like performance, higher gross margin and a credible explanation of how the multitude of investments in UK stores will improve the brand’s overall performance.' He adds: 'we fear that Tesco’s UK operations have a lot to get right if they are to hold the current margin this year.'


The following table spells out the good and bad parts of Tesco during the six months to 24 August. As you can see, there are very few bright spots. There's also no growth in the dividend.


Tesco table one


Like-for-like UK food sales increased by 1% in the second quarter. But Tesco says total UK like-for-like sales were held back by 'initial work on transformation of general merchandise business, ahead of migration to higher-margin, higher-growth categories.'


Tesco table two


The Tesco Direct operation has become more profitable despite lower sales following a 're-ranging' of instore general merchandise, particularly electrical items. It has launched a budget tablet device called Hudl which will retail at £119, more than half the price of Apple's iPad mini. This could be an interesting area to watch although it faces competition in its price bracket from Amazon's Kindle Fire device.


As flagged up in August, Tesco has formed a joint venture in China with CRE. That deal has now been fleshed out, with Tesco combining its 134 Chinese stores and shopping mall business with China Resources Vanguard's 2,986 stores. Tesco is paying £185 million to the joint venture and a further £80 million once it gets regulatory and CRE shareholder approval, expected in the first half of 2014, and then a further £80 million a year later.

Issue Date: 02 Oct 2013