Tesco Reports FY 2010/11 Sales & Profits Tomorrow - More Red Ink at Fresh & Easy Neighborhood Market

Analysis

United Kingdom-based Tesco reports its 2010/11 fiscal year preliminary sales and profits tomorrow, including what the global retailer estimates will to be a loss of about $253 million for its U.S. Fresh  Easy Neighborhood Market fresh food and grocery chain. The estimated $253 loss is the same amount Fresh & Easy last fiscal year.

Overall, Tesco plc, which has stores in 14 countries, is expected, according to a consensus estimate of financial analysts in The City, the United Kingdom's version of Wall Street, to report an around 10% rise in profits - 3.75 billion pounds ($6.1 billion) - for the fiscal year, which ended February 26, 2011.

Tomorrow's fiscal year reporting will be Tesco CEO Philip Clarke's first time facing investors, analysts and the media as the head of the world's third-largest retailer (after number one Walmart Stores, Inc. and number two Carrefour, of France), having replaced Terry Leahy as CEO in early March.

But Clarke, who's in his early 50's, is a Tesco veteran. He started with Tesco as a part-time stock clerk at age 14 and is a product of the retailer's management training program and executive succession process. Therefore, he should know the drill fairly well, even though he's only been in the corner office for seven weeks.

Before being named in June 2010 as Leahy's replacement, Clarke was Tesco's chief of international operations (Europe and Asia) and the corporate head of information technology. He's also served on Tesco's board for a number of years and continues to do so as CEO.

Speaking of Asia, which Clarke was responsible for before becoming CEO last month, the region is expected to have performed well from a fiscal-year sales growth standpoint for Tesco, when it reports tomorrow. The Asia region performance is expected to buffet what are somewhat sluggish sales growth for Tesco at home in the United Kingdom.

Sales in the United Kingdom, where Tesco is the dominant food and grocery retailer, holding a whopping 30% market share, are expected to be a bit sluggish when the retailer reports the metric for its home market tomorrow. Walmart-owned ASDA and Sainsbury's are Tesco's two leading competitors in the United Kingdom. Combined, the two chains account for about 34% of all the food and groceries sold in the nation, which is just slightly more market share than Tesco does on its own.

The United Kingdom remains crucial to Tesco though because although it's a global retailer, its home market accounts for a bit over two-thirds of total corporate revenue and profit.

In addition to fresh food and groceries, Tesco is a general merchandise retailer in Britain, selling everything (in stores and online) from clothing, books and household supplies, to consumer electronics, bicycles and, most recently, used cars, via an online website launched this month.

In the United Kingdom Tesco is also a retailer of insurance - auto, homeowners, pet, ect. - and cell phones, as well as having a strong business as a consumer mobile phone carrier company. Tesco is also a banker in Britain, with its Tesco Bank, which is one of the faster-growing financial institutions in the United Kingdom.

USA: Fresh & Easy Neighborhood Market

In October 2010, when it reported its mid-fiscal-year sales and earnings numbers, Tesco said it expected to post a full-year loss for Fresh & Easy this year of about the same amount as it did the previous year - about $253 million.

Tesco reported a half-year 2010/11 loss of $159 million for Fresh & Easy USA. [See - October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market.]

The expected full-year loss in the $253 million range at Fresh & Easy Neighborhood Market comes despite a significant increase in sales over the 2009/10 fiscal year, largely do to the opening of numerous new fresh & Easy stores.

This - significantly growing year-over-year sales without a reduction in  losses - is (or at least should be), in our analysis, a very disturbing trend for Tesco with its Fresh & Easy chain.

For example, Tesco's $253 million fiscal year 2009/10 loss for Fresh & Easy Neighborhood Market was $45 million more than its 2008/09 year loss of $208 million, despite the fact Fresh & Easy opened numerous new stores in the 2009/10 period and added a substantial amount of sales. [For details see  - (fy 2009-10) April 20, 2010: Strong Group Revenue & Profit For Tesco... But $253 Million Loss at Fresh & Easy; and (fy 2008/09) April 21, 2009: Tesco PLC Reports Record Sales and Profits; But Takes £142 Million ($208.05 Million U.S.) Loss For Fresh & Easy Neighborhood Market USA.]

The 2008/09 fiscal year was Tesco's first full-year with Fresh & Easy. The first stores were opened in November 2007.

Tesco had 50 Fresh & Easy stores open at the end of its 2008/09 fiscal year, which ended in February 2009. There were 145 Fresh & Easy units open and operating at the end of the 2010/11 fiscal year, which ended in February 2010. And at the February 26, 2011 end of Tesco's 2010/11 fiscal year, the retailer had 164 Fresh & Easy markets open.

Negative three-year performance trend

>Sales at Fresh & Easy Neighborhood Market were $305 million for the 2008/09 fiscal year, with a loss of $208 million.

>Fiscal year 2009/10 sales were $544 million. Fresh & Easy lost $253 million for the year.

>Tesco reported mid-year 2010/11 sales of $388 million, with a half-year loss of $159 million.

The disturbing trend: Over the three year period, revenue has grown significantly at Fresh & Easy - but so has the loss. without any reduction in the chain's losses.

We estimate Fresh & Easy's fiscal 2010/11 full-year sales will be in the $777-$800 million range. Therefore, if our estimate is correct, and if Fresh & Easy Neighborhood Market has the $250-$253 million (or even slightly less) loss Tesco has said it will report tomorrow, that means the disturbing trend of growing sales without a reduction in loss will continue to persist.

Tesco has said it will break-even with Fresh & Easy USA by the end of its 2012/13 fiscal year, which ends February 2013. That gives the retailer the rest of this year and all of 2012 - 22 months to be precise - to take the loss amount reported tomorrow for Fresh & Easy - the $253 million or so - from over $250 million zero - to break-even.

Looking at the analysis we provided above - the disturbing trend of growing sales without shrinking losses - it should be clear that in order to achieve break even in 22 months, Tesco CEO Philip Clarke and his deputy, Fresh & Easy Neighborhood Market CEO Tim Mason, are going to have to pull a rabbit (Easter is this week) out of their respective hats. After all, it's rather difficult, although not impossible, to reverse the three year trend of significantly growing sales without any narrowing of loses, in under two years.

In order to do so, CEO Clarke must ask himself if Mason, who became Tesco deputy CEO in March, and the current Fresh & Easy senior management team can get it done - and Tesco's handful of outside board members and its biggest institutional investors should challenge Clarke to ask himself that - because, in our analysis, at present we see little in Fresh & Easy Neighborhood Market's current overall strategy and operations - including the negative 38% margin it reported in October 2010 for the mid-fiscal-year -  that puts it on track to break even by early 2013. And the clock, which ironically is a key part of Fresh & Easy's branding and logo, is ticking rapidly to 2013.

We'll have additional coverage, analysis and commentary on Tesco's fiscal year 2010-11 results starting tomorrow, after the retailer reports.

Related Stories

December 7, 2010: Tesco Reports Solid Third Quarter Same-Store-Sales Growth For Fresh & Easy Neighborhood Market

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

October 4, 2010: Tuesday's Tesco Interim Report Offers A Road Map of Sorts For the Future of Fresh & Easy Neighborhood Market

April 20, 2010: Strong Group Revenue & Profit For Tesco... But $253 Million Loss at Fresh & Easy

April 19, 2010: Tesco Reports Fiscal 2009 Results on Tuesday, April 20; Estimated $250-$259 Million Loss For Fresh & Easy

April 21, 2009: Tesco PLC Reports Record Sales and Profits; But Takes £142 Million ($208.05 Million U.S.) Loss For Fresh & Easy Neighborhood Market USA

April 20, 2009: Tesco to Report Full-Year Financials Tomorrow; We Estimate £110-£150 Million Full-Year Loss For Fresh & Easy Neighborhood Market

September 30, 2008: News & Analysis: Tesco Reports Half-Year Financials; Reports Loss For Fresh & Easy USA and Sales Per Square Foot Averages

September 29, 2008: Tesco PLC to Report Interim Financials Tomorrow; Including Guidance on Fresh & Easy Neighborhood Market USA

September 26, 2008: Tesco PLC, Fresh & Easy and the Numbers Game; Will Tesco Release Hard Numbers For Fresh & Easy Next Week? If So, Will They Be Meaningful?