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Is Tesco an Exciting Emerging Market Play?

Royston Wild
April 30, 2013

LONDON -- While crippling austerity in Europe and fiscal obstacles could put the brake on growth rates there, in developing regions a backdrop of accommodative central bank action, elevated commodity prices, and rising personal affluence levels have created an environment of exceptional commercial opportunity.

The divergence between the growth prospects of traditional and developing markets is borne out by latest International Monetary Fund's (IMF) growth projections, which expect developing nations and emerging markets to expand 5.3% and 5.7% in 2013 and 2014, respectively. By comparison, it anticipates that the U.S. economy will rise 1.9% this year and 3% in 2014, while eurozone GDP is forecast to dip 0.3% in 2013 before rebounding just 1.1% next year.

Bubbly activity in these developing geographies can create large opportunities for many London-listed firms. Today, I am looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY) and assessing whether its  operations in these regions are likely to underpin solid earnings growth.

Profits slip as U.S. exit confirmed
Tesco announced in this month's full-year results release that annual profits slipped for the first time since the mid-1990s for the 12 months ending Feb. 2013, with statutory profit before tax nosediving 51.5% to 1.96 billion.

In addition to taking a massive 804 million pound writedown on the value of its U.K. assets and writing down almost 500 million pounds on its Polish, Turkish, and Czech operations, the company finally confirmed its exit from its Fresh & Easy U.S. venture, which has struggled since its inception a little more than five years ago. The doomed venture caused the supermarket to take a hit in the region of 1.2 billion pounds.

Tesco has extensive operations spanning the globe, but the U.S. is not the only area where it has experienced difficulties. It was forced to exit Japan at the start of the year after failing to generate sufficient business during its nine-year stay. However, the market continues to make headway into other parts of the world, most notably still in Asia.

Asian operations keep on rolling
The supermarket saw sales in Asia hit 12.3 billion pounds last year, up 6.1% on a constant currency basis. Tesco's operations span the continent, with activities in China, India, South Korea, Malaysia, and Thailand. The company plans to open 2.8 million square feet of new retail space in Asia this year.

Sales surged in Thailand last year as Tesco's store openings there ramped up, although trading hour restrictions in Korea weighed heavily on regional performance. But the company sees the region as crucially important for future growth and plans to follow up its successful launch of online shopping in Thailand last year with the launch of its Internet service in China thi