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Tesco is facing fresh headwinds at its international operations, just as chief executive Philip Clarke is battling to turn round its UK business.
The supermarket group has suffered a slew of downgrades to profit forecasts, as a result of restrictions imposed on big retailers’ store opening hours in South Korea, which are expected to hit its sales and profits.
These international pressures come at a delicate time for Tesco, which was forced to issue its first profit warning in 20 years in January, after the worst performance from its UK business in decades.
Now analysts are questioning its prospects overseas. “Whereas we see steady progress in stabilising the UK, we have growing worries about the financial performance outside the core chain, largely due to factors beyond Tesco’s control,” said Clive Black at Shore Capital.
JPMorgan Cazenove and Nomura, both brokers to Tesco, have each cut their forecasts of Tesco’s pre-tax profit this year, excluding property profits, by 2 per cent to about £3.5bn – reflecting a £70m reduction in profits from Korea.
Tesco said: “Our international business contributed £1.1bn profits to Tesco last year. We have already built market leading positions in many countries and our businesses around the world give us significant opportunities for long-term growth.”
However, last month, Mr Clarke slammed the restrictions in Korea as “not helpful for our biggest business outside of the home market”.
Mr Black also noted that the group was facing other pressures outside of its UK heartland, including a sharp slowdown in sales growth at Fresh & Easy, its lossmaking US business.
He has cut his forecast of Tesco’s pre-tax profit excluding property profits this year by 5.6 per cent to £3.35bn, to reflect lower expectations for Korea, the US, central Europe and the UK.
At the same time, Mr Black has raised his forecast of losses at Fresh & Easy by £13m, to £103.3m, for this year. With losses of £52.3m forecast for the year to February 2014, this would take Fresh & Easy’s cumulative losses to more than £800m.
At Tesco’s annual meeting last month, Mr Clarke insisted that he remained committed to Fresh & Easy. But he acknowledged that, if there was no prospect of turning Fresh & Easy round, then Tesco would look at withdrawing from the US, as it had done in Japan.
Tesco is poised for a shake-up of its advertising in the UK after naming Wieden + Kennedy as its new agency on Friday.
Additional reporting by Simon Rabinovitch and Simon Mundy