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Tesco rethinks UK new space plans as profits tumble

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Tesco (LON:TSCO) has posted its first fall in profits in almost 20 years while the revival in like-for-like sales growth appears to be stuttering.

Underlying profit before tax fell 14.5% to £3,549mln in the 52 weeks to 23 February 2013 from £4,149mln the year before.

The company took an £804mln hit on a write-down of its UK property portfolio, having identified more than 100 sites, many of which were bought at a higher point in the property cycle, that it no longer plans to develop.

Along with a £495mln goodwill impairment on its operations in Poland, the Czech Republic and Turkey plus a £115mln increase in provision for payment protection insurance claims against Tesco Bank, the write-down contributed to reported (statutory) profit before tax of £1,960mln, less than half the level of the year before.

Even the UK property write-down was dwarfed by the £1.0bn bath Tesco is taking on its US Fresh & Easy operations, although this number was widely leaked ahead of the results.

The company confirmed it took the decision to abandon its ill-timed US foray on February 14, and the operations have been treated as discontinued in the accounts. Fresh & Easy made a trading loss of £169mln in 2012.

Total sales, including VAT, worldwide rose 1.3% to £72.4bn from £71.4bn the year before. UK sales were up 1.8% to £48.2bn, but like-for-like (LFL) sales were down 0.3%.

In the UK, sales in the final quarter of the fiscal year (i.e. three months to 23 February) were up 0.5%, excluding petrol but including value added tax (VAT). Given that the company was boasting of LFL sales growth in the UK of 1.8% in the six weeks to 5 January, it looks like the Tesco revival might already be running out of steam.

Despite that, chief executive Philip Clarke said the company’s plan to ‘Build a Better Tesco’ is on track, with the company making “real progress” in the UK.

“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,” Clarke said.

The final dividend has been maintained at 10.13p, giving an unchanged full year dividend of 14.76p.

Tesco shares tumbled 4% to 369.7p in the first hour of trading.

Quick facts: Tesco PLC

Price: 251.3 GBX

LSE:TSCO
Market: LSE
Market Cap: £24.61 billion
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