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Reading Tesco Between The Lines

Jim Prevor’s Perishable Pundit, April 18, 2008

As part of our extensive coverage of Tesco’s journey to America, we recently discussed comments about the performance of Fresh & Easy that Tesco released in the course of its recent earnings release. We entitled that piece, Tesco’s Earnings Report Comments Indicate Better Sales; $200 Million In Losses Expected.

Tesco’s comments implied that sales at Fresh & Easy were higher than we estimated, so we wrote this:

As we have mentioned many times, we would like nothing better than to see Tesco succeed in the U.S. In a consolidating market, a new retail concept rolling out nationally and inspiring others to launch small format chains will be a boon to the supply side. So if we were wrong in our assessment, we will joyfully eat crow. But we will hold on calling the baker to make the blackbird pie until we actually see full financials.

Those comments brought forth a great deal of commentary, including this letter from a highly experienced retailer turned consultant:

Don’t worry… you won’t be wrong about Tesco. Tesco is doing all they can to cover up their failure. Their press releases are carefully worded to put a positive spin but not to lie at the same time. Re-read what they say. Basically they are saying it’s possible that one or two stores might have cracked $200k during one week of grand opening. Unless they release sales for all stores individually for the past quarter, we will still have to go by the 2nd hand reports given to us by former employees who are leaving the company.

Look at what Tesco actually said and my translation in bold right next to it:

WHAT TESCO SAIDWHAT IT ACTUALLY MEANS
1. Sales are ahead of budgetWe reworked all the budgets to adjust to lower sales
2. Sales densities are already higher than the U.S. supermarket industry averageThat is about $8 per sq. ft. per week or about $80k per week
3. With our best stores exceeding $20 per square foot per weekPerhaps two stores during grand opening week.
4. We are seeing strong growth in the early stores as we step up, as planned, our marketing programs and as we build awareness of the brandMaybe the first stores are up 20% from $50k to $60 — easy to get a big % when sales are low.
5. This is also reflected in the strong sales performance of recent openings in all of our markets in Southern California, Nevada and Arizona. Fresh foods and own brand products have sold particularly well, confirming that the core of our offer has already gained acceptance with customersIf you have just one customer then you have at least some acceptance.

This kind of coded language is an insult to everyone in the industry.

— David J. Livingston
DJL RESEARCH, LLC
Pewaukee, WI

Although we don’t think we’ve ever met David, we bet he knew our old friend Gene Battaglia, who worked at Scrivner during David’s stint as a market analyst at the same company, where David studied under Dave Richards, who is well known for his expertise in site analysis and gravity modeling.

He surely knew Frank Gillespie, who was running produce while David was Market Research Manager at Roundy’s. Roundy’s tried to defray some of its fixed costs by operating a consulting business which David ran. When Roundy’s was sold to investment firm Willis Stein & Partners in 2002, David went out on his own providing site analysis, market intelligence, due diligence, geo-demographic mapping and other services.

David’s analysis is right on target. As we discussed here, Tesco had initially promised The City — London’s version of Wall Street — to release separate financials for the US unit. It reneged on that commitment and included the results in its massive UK unit, so nobody has any audited financial information on Fresh & Easy.

Now Tesco did release comments which seem to imply a lot.

Yet if Tesco was going to release information such as sales densities and losses, why did it renege on its commitment to release full financials?

We don’t know, of course, but it is worth noting that the reason companies have to issue audited financials and not give literary comments about their results is because what we call Generally Accepted Accounting Principles (GAAP) in the US and International Accounting standards (IAS) in Europe allow for reasonable comparisons between companies that report under relatively fixed definitions. Securities regulations also call for outside auditors to sign off on financials.

Here we are left wondering. When Tesco says, “Sales densities are already higher than the U.S. supermarket industry average,” we have no idea what measurement Tesco is using. The company put up a graph, for example, that only includes stores open before Christmas… are those the only stores included in this calculation?

Why say something as vague as “higher than US supermarket averages”? Why not say, “in the week ending March 29, 2008, we had 56 stores open and average sales in those 56 stores exceeded our $9-a-foot estimate of the average sales density for US supermarkets.”?

What is the point of making statements such as “sales are ahead of budget” without saying when the budget was drawn up or how much they were budgeted for? And if sales are ahead of budget, what expenses are so much greater than budget that Tesco now expects to lose around $200 million dollars this year on Fresh & Easy — four times the consensus estimate!?!

The more we dig into the release and the report, the less it tells us and the more inclined we are to think we have to stick to our own tracking methods until Tesco actually starts releasing audited financial statements on its US division.

Many thanks to David J. Livingston and DJL research for helping us assess this important topic.

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