8 Dec 2011

Tesco plans for eurozone break-up

Britain’s biggest retailer said it was taking the risk of a eurozone break-up seriously” and had taken steps to reduce its exposure to such an event. Tesco is shifting its currency exposure, holding cash and refusing to sign long-term supply contracts in the face of the eurozone crisis.
Laurie McIlwee, Tesco’s finance director, said of a possible break-up: “Of course we’ve looked at it. Any business has got to take disruption in the eurozone seriously”.

Tesco’s finance chief said the retailer did not have any businesses directly in the eurozone core but that “currency management has been appropriately derisked”. He did not elaborate but the retailer is thought likely to have cut its euro holdings and moved cash into safer currencies such as the dollar or sterling, as well as better managing its exposure to eurozone suppliers.

Mr McIlwee also said he had made sure Tesco has “no refinancing risk until February 2014” and had already raised debt to pay off a £1.5bn bond due next year in the event that the credit markets seize up. “That’s not a shock you want,” he said of the threat of paying the bond back from cash flows. “We’ve already raised money to pay it [the bond] off and put the cash in the bank.”
Holding cash in the bank after raising capital in the debt markets is inefficient and underlines how seriously the retailer is taking the euro situation.
On supply contracts Mr McIlwee said of the current situation: “We wouldn’t go long on any contracts with any supplier – everything in the market is much more short-term. You wouldn’t know if they had the liquidity and they wouldn’t know if you had it.”
The warning on the euro came as Tesco updated the market on sales numbers for the 13 weeks to November 26, with trading buoyed by its international business.
Group sales rose 7.2pc, but in the UK – where the retailer takes around £1 in every £10 spent in shops and makes around 75pc of its profit – like-for-like sales excluding VAT and petrol fell 0.9pc.
Mr McIlwee said the fall in like-for-like sales in the UK was wholly a reflection of the retailer’s Big Price Drop campaign which saw prices cut on 3,000 products.
He added that Tesco was one of “a very short list” of retailers to see higher volumes as he defended the campaign: “It’s not a promotion... it’s a medium term strategy. It’s lasting impact should be judged after months not weeks,” he said. “We’re very determined on this. It will be successful.”
Tesco cut prices on products in the face of stiff competition for shoppers. Many consumers hit by the slowing UK economy, job losses, government austerity measures and high fuel prices have been turning to budget supermarkets such as Lidl and Aldi.
The retailer’s businesses outside the UK delivered strong growth in the period, with like-for-like sales at its Fresh and Easy stores in the US rising 11.9pc. Mr McIlwee said that while that performance was positive, “it needs to be closer to 20pc”.
In Asia the disruption in Thailand caused by the flooding interrupted what the company called “an otherwise strong sales trend”. Sales at stores open for a year or more rose 0.9pc but the company took a £50m hit in lost sales and damages from the natural disaster.
The group also saw improved trading in Europe, boosted by stronger sales in Poland and Slovakia. Overall like-for-like sales growth strengthened to 0.9pc, from 0.1pc in the second quarter. Trading in Ireland remained difficult with like-for-likes slightly below last year. Source