Tesco Falls as Overseas Weakness Gives CEO a New Headache

(Bloomberg) -- Weakness in Tesco Plc’s overseas business is a new thorn in Chief Executive Officer Dave Lewis’s side.

The supermarket chain’s shares declined as much as 9.4 percent Wednesday, the most since July 2016, as profit fell short of estimates amid weakness in Asia and eastern Europe. That outweighed accelerating sales gains in the U.K., where Lewis’s overhaul is building momentum.

Tesco Falls as Overseas Weakness Gives CEO a New Headache

Price cuts and promotional costs in Thailand, where Tesco is trying to reposition its brand, hurt Asian profit in the first half, and the effect is expected to drag on through the year. The company had previously said it would reduce bulk selling in that market to raise profitability.

“We’ll have some challenges as we walk through that,” Lewis said on a call with analysts. “We’ll exit in a position that’s much better for Thailand.”

Under Lewis, Tesco has been paring back its overseas business to focus on the U.K. In 2015, it sold South Korean chain Homeplus, disposing of its Turkish operations the following year. The remaining international units in Asia and Europe, including Thailand and a money-losing Polish operation, make up about one-fifth of sales.

The U.K. operations, the focus of investors’ concern in recent years, continued their turnaround after a massive accounting scandal, brutal price competition and cost pressures from Brexit. Comparable sales rose by 2.5 percent in Britain in the second quarter, the company said, above analyst estimates. Tesco said it’s on track to reach profit-margin goals for 2020.

Sainsbury Deal

Lewis has thrown down the gauntlet to J Sainsbury Plc as the rival grocer moves to take over Walmart Inc.’s Asda, cutting prices on a range of private-label goods. Tesco has also launched a new chain of discount stores called Jack’s.

Tesco’s purchase of wholesaler Booker, completed earlier this year, is also paying off: The company said savings from the deal are on track and the new unit boosted profit by 97 million pounds ($126 million).

The company’s adjusted operating profit of 933 million pounds for the first half fell short of analyst estimates by almost 60 million pounds. Wednesday’s plunge in the shares cut their gain to 2 percent this year.

©2018 Bloomberg L.P.