Supermarket titan Tesco has announced that it is considering a sale of its loss-making US division, Fresh & Easy, as it revealed that the frontman of the unit, Tim Mason, will leave the company after 30 years’ service.
To accompany the group’s third-quarter trading statement, in which it revealed a decline in like-for-like (LFL) sales in the domestic UK market, Tesco Chief Executive Officer Philip Clarke said that he would be conducting a strategic review of Fresh & Easy.
The news follows an announcement in October that revealed that new capital investment in Fresh & Easy was to be tightly constrained whilst the business focused on reducing costs and improving the profitability of its existing stores. LFL sales at Fresh & Easy declined by 2% in the third quarter.
‘It is now clear that Fresh & Easy will not deliver acceptable shareholder returns on an appropriate timeframe in its current form,’ Tesco said in a statement.
The company has now appointed investment bank Greenhill ‘to assist with the review of options’. Tesco said that it has received ‘a number of approaches’ in recent months from parties interested in buying part or all of Fresh & Easy.
‘Whilst the business has many positives, its journey to scale and acceptable returns will take too long relative to other opportunities. I have therefore decided to conduct a strategic review of Fresh & Easy, with all options under consideration,’ Clarke said.
He added: ‘Tim Mason, who leaves Tesco today, has played an important part in our success over a 30 year career with the company, and he leaves with my thanks and good wishes.’
In a research report this morning, analysts at Nomura said that the strategic review ‘points to a management team willing to act decisively to improve its capital allocation and discipline.’
The broker reckons that a US exit will benefit Tesco’s full-year earnings and return on capital employed (ROCE) by 4% and one percentage point, respectively.
Group sales in the 13 weeks to November 24th rose by 2.4% including petrol at constant exchange rates (up 1.0% at actual rates) and by 2.9% excluding petrol at constant exchange rates (up 1.4% at actual rates).
As expected, while the food business in the UK continues to perform strongly, non-food sales have disappointed, with Clarke admitting that the general merchandise performance ‘was not good enough’. Total UK sales including VAT and petrol grew by 1.7% and (up 2.3% excluding petrol) but LFL sales exclude VAT and petrol fell by 0.6%, as anticipated by analysts.
Internationally, Tesco noted that consumer spending in Central Europe had weakened further in the quarter, though this has been partly offset by a better performance in Asia. Total sales at constant exchange rates in each division increased by 1.1% and 6.8%, respectively.
The company said: ‘In the UK, ahead of the important seasonal period, and with the progress we have made so far on our plans to improve the shopping trip for customers, our outlook for the year as a whole is unchanged.
‘Elsewhere, we expect the broad trends in the third quarter to continue through the balance of the year, in particular the increasingly tough conditions for consumers in Central Europe.’