Tesco Rallies As Retailer Mulls US Exit

WEDNESDAY MARKET UPDATE: A surge in Tesco shares and a rally in the mining sector helped push the FTSE 100 out of its recent lull

Alanna Petroff 5 December, 2012 | 5:56PM
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Shares in Tesco (TSCO) surged by just over 3% on Wednesday as investors reacted to news that the retailer may exit the US market.

"With regards to [Tesco's] Fresh & Easy [chain] in the US, Tesco has announced a strategic review that will most likely result in a sale or closure of its 200 stores," stated Morningstar analyst Michael Keara in his latest research report.

"Fresh & Easy has failed to generate a profit despite being in its roughly fifth year of operation, which is when viable concepts typically mature and begin to deliver high EBITDA margins. We view the move to exit the US market as a positive and believe capital can be used more prudently in other areas," said Keara. 

The announcement of a potential exit came as Tesco released its third-quarter interim management statement, which showed a decline in like-for-like sales over the quarter.

"I find little to cheer about in the Tesco figures," said Morningstar columnist Rodney Hobson. "Tesco's outlook is said to be in line with previous guidance but the last statement in October alongside half-year figures was short on specifics so I cannot feel we are any wiser."

"Non-food items, the lines that gave Tesco a great edge over competitors in the past, have become a drag and those supermarkets that concentrated more on food are now at an advantage," he said.

"Tesco has been slow to react to problems in the US. Investment there has already been reduced so it is hardly a surprise that Fresh & Easy is still struggling. Its chief executive is going so what is stopping Tesco from putting the chain up for sale immediately?" said Hobson. 

"Group chief executive Philip Clarke has his work cut out. I cannot feel that Tesco has made any progress under his leadership. He seems to be bogged down in damage limitation," he said.

Shares in Tesco helped lead the overall UK markets forward on Wednesday. The FTSE 100 index jumped up by 23 points, or 0.4%, to close at 5,892. The FTSE 250 index also pushed up by 50 points, or 0.4%, to close at 12,103.

The mining and resources sector also helped pull the UK markets forward, with Kazakhmys (KAZ), Rio Tinto (RIO), Vedanta Resources (VED) and Eurasian Natural Resources (ENRC) amongst the top 10 gainers on the FTSE 100.

Meanwhile, Chancellor George Osborne revealed his Autumn Statement on Wednesday afternoon, though commentators say this had very little effect on the markets.

"The Chancellor's Autumn Statement barely impacted equity markets, offering little in the way of any surprise, albeit that growth predictions for the next five years were well and truly slashed, with little more than 1.2% growth expected in the coming year," said Brenda Kelly, a market analyst at IG.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Rio Tinto PLC Cedear8,640.00 ARS0.00
Tesco PLC350.90 GBX0.66Rating

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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