AND so the curtain falls on Terry Leahy’s remarkable reign at Tesco. Most investors will be shocked by his departure; the received wisdom was that Leahy would stick around until 2014, when its troubled Fresh & Easy US venture started to come good.
His exit is a major loss for the grocer, there is no doubt about that. The company he leaves is virtually unrecognisable compared to the one he joined a decade and a half ago. Tesco’s remarkable expansion – both in terms of products and geographical location – now serves as a blue-print for how to grow. Currently the world’s number three retailer, it has every chance of becoming number two.
Replacement Philip Clarke might not be a household name, but his time as chief of Tesco International will serve him well. Compared to its home-grown rivals, Tesco has a massive global footprint; J Sainsbury and Morrisons haven’t opened any overseas stores in the last three years – but 65 per cent of Tesco’s floor space is now abroad.
The effect on the bottom line has been clear: last year, trading profits in Asia were up by 14 per cent to £440m, on sales of around £9bn. And there’s much more to come. Although 65 per cent of floor space is abroad, these younger stores account for just 23 per cent of sales. As they approach full profitability over the next five years or so, they will become the group’s major cash cows.
Clarke’s appointment tells it loud and clear: Tesco is going to become an international – predominantly Asian – firm. Depressing as it may be, it is following the likes of Standard Chartered, Prudential and HSBC in search of Eastern promise. The party in the UK is well and truly over.
With that in mind, Tesco deserves a richer valuation. Currently trading on just around 14 times expected earnings in 2011, in line with J Sainsbury and Morrisons, it should now be judged in the same category as the global big hitters like Germany’s Metro and France’s Carrefour (both trade on around 16 times prospective earnings). Leahy’s departure was weighing on the stock yesterday, which closed down 2.4 per cent at 397.40p, creating a perfect buying opportunity.