Tesco's 2013 pre-tax profit drops to £3.05bn

Tesco, the world's third-largest supermarket, has announced a 6.9 per cent drop in full-year underlying profit before tax, to £3.05bn.

Over the next three years, it's hoping to stake a claim as the multichannel, middle-market store.

But the question is how easy that'll be in a climate of booming discounters and high-end stores, where consumers can choose price or quality, and falling sales suggest they're not quite sure where Tesco now fits in. 

Group trading profit declined to £3.3bn - that’s a six per cent fall from a year earlier, and almost seven per cent at constant exchange rates.

UK sales fell 0.1 per cent to £4.8bn, while revenue remained flat. The struggling store saw like-for-like sales excluding VAT and petrol fall 1.4 per cent in 2013.

The yearly profit falls, the second Tesco's announced, are in line with already low expectations. Shares have jumped this morning, gaining over 4.5 per cent. But yhey are, however, at a ten-year low, meaning the bounce is more about nasty surprises already being priced in - a sigh of relief, rather than a cheer. 

Not just the UK

Tesco has also been affected by the tougher economic climate in several parts of the Eurozone, with sales falling 0.4 per cent to £1.1bn. At constant rates, that’s a two per cent drop. An impairment charge meant a £734m loss of value for its European business.

It’s also taking a £540m goodwill impairment charge in China, confirming its Chinese business is now classified as a discontinued operation, following its partnership with CRE.

Despite announcing on Monday that it’s taking its F&F clothes business to the US, Tesco has been heavily slimming its global presence. 

The significant drop in performance follows reports by the FT last night that chief executive Philip Clarke, who has headed up the store since 2011, has faced calls from a top shareholder to step down, following several attempts to turn things around which just aren't having the desired effects. 

Defending the fortunes of Tesco on Radio 4's Today programme this morning, Clarke said of his own role: : "I intend to see the job through". 

Too many popular players to turn things around?

He said the focus for the company now is on establishing "multichannel leadership" and improving current stores. Tesco's bank will shortly be offering current accounts, and last year it launched home delivery in five countries and sold over half a million Hudls, its budget tablet.

Clarke explained the firm's plan to "refresh" 650 stores over the next year, meaning a three year turnaround period. 

The advent of German discounters Lidl and Aldi - which have seen growth of around 30 per cent - has hit large discounters like Tesco hard.

The concern and criticism is that Tesco, having been knocked off its perch, is now caught between discounters and high-end stores, in an arguably saturdated market, with no clear way forward. 

But Clarke remained confident that there's light at the end of the tunnel and, following the crucial three-year period, Tesco will be firmly established as a middle-market retailer, which offers low prices and good quality - all under one roof.

It remains to be seen how convinced investors will be. Analysts at Shore Capital have called the results "very worrying": 

With respect to the future, we cannot hide our concern about Tesco's immediate financial and share price prospects and so the return for its shareholders.

Most fundamentally we return to the core UK market where trading momentum at the start of the second month of 2014/15 appears to be very worrying, with market data suggesting down high single digits.

Accordingly, we harbour ongoing concerns about scope for further downgrades to our already heavily marked down recent estimates for the core chain.

When it comes to outlook, Tesco said:

We expect the challenging consumer environment, competitive intensity, and the rapid pace of change in retailing to continue in 2014/15.  …we are focusing on increasing loyalty and improving sales which will lead to sustainable profits and returns over the medium term, consistent with our financial guiderails.

Tesco said it’ll maintain a final dividend of 10.13p per share, meaning a full year dividend of 14.76p per share.

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