Tesco has grown much further and faster than domestic rivals like J Sainsbury and Wm Morrison. At Sainsbury’s, 10 per cent of shop floor space was opened in the last three years; at Morrisons, 6.4 per cent of space is classed as “new”; but 28 per cent of Tesco’s floor space is less than three years old.
It is also has a huge international footprint compared to Morrisons or Sainsbury’s, which haven’t opened any overseas stores in the last three years. Around 65 per cent of Tesco’s floor space is now abroad.
The effect on the bottom line is clear: trading profits in Asia were up by 24 per cent last year to £440m on sales of £9bn. The group’s Fresh & Easy operations in the US continued to drag on profitability, losing £165m last year, although management say losses have now peaked. But the problem in the US is that Tesco has a huge distribution centre without enough stores to make it profitable; as more shops come online, that should change.
Overseas profits will? boom in the next three years. Although 65 per cent of floor space is abroad, these immature shops account for just 23 per cent of revenue. As they approach full profitability (which will take between four and five years), these stores will become serious cash cows.
Like British peers Sainsbury’s and Morrisons, Tesco trades on around 13x earnings. But it could be time to start pitting it against global retail rivals like France’s Carrefour and Germany’s Metro, which both have huge overseas operations and trade on around 16x earnings.
One last thought, courtesy of Greg Lawless at Collins Stewart: Tesco’s market cap at yesterday’s close was £34.6bn, almost exactly the same as the value of its property portfolio. So any shares in Tesco are accounted for by bricks and mortar. The international growth story, the excellent management team, the defensive business model – all of that comes for free.