Rabu, 01 Februari 2012

Tesco's Fresh & Easy By the Numbers ... In Case You Want to Keep Score at Home or in the Office

Photo credit: Fresh & Easy Buzz.
Analysis/Commentary

Tesco's Fresh & Easy Neighborhood Market opened two new stores today - a 3,000 square-foot Fresh & Easy Express unit at Crown Valley Parkway and Golden in Laguna Niguel, California, and a standard 10,000 square-foot Fresh & Easy fresh food and grocery market at Silver and Goettingen, in San Francisco's Portola District.

The opening of the two stores today brings to eight the number of Fresh & Easy units Tesco has opened so far this year. (see the locations of the eight stores here.)

Fresh & Easy Neighborhood Market ended 2011 with 184 stores in California (135 units), Nevada (21 units) and Arizona (28 units).

The eight new stores opened thus far in 2012 brings the total store-count for the fresh food and grocery chain to 192 units - 143 stores in California, 21 Fresh & Easy markets in Nevada and 28 units in Arizona.

But not for long...

As regular readers of Fresh & Easy Buzz are aware, we broke the news on January 9, 2012 (see story here) that Tesco's Fresh & Easy Neighborhood Market was planning to close 12 stores. On January 10 (see here) we followed up our story with a second scoop, in which we listed the locations of the 12 stores set to be closed. Following the publication of our stories, Fresh & Easy's corporate spokesperson announced the store closures.

All 12 stores (see the locations here) are set to be closed by the end of this weekend. (The latest store closures follow the closing of 13 Fresh & Easy stores in November 2010.) Therefore, Fresh & Easy's 192 store-count is a temporary metric.

Come next week, Fresh & Easy Neighborhood Market will be a 180-store chain - 136 units in California, 20 stores in Nevada and 24 units in Arizona - and Tesco will be operating four fewer Fresh & Easy stores than it was at the end of 2011.

But not for long...

The 180-store number is also a temporary metric: Tesco plans to open a number of Fresh & Easy stores this month, and many more, including its first units in metro Sacramento, California, in March. Additional stores are set to open this year as well.

One of the next stores to open will be the Fresh & Easy Express unit, Tesco's fourth 3,000 square-foot micro-format food and grocery store so far, at Figueroa Street and Jefferson Boulevard, near the University of Southern California campus, in Los Angeles. The store opens February 15.

Tesco plans to open five more "Express" stores between now and the end of March 2012. (See the locations of the eight 'Express' stores here.)

Additionally, Fresh & Easy Neighborhood Market is planning a ninth Fresh & Easy Express store in the Southern California city of Bell. Plans for the store are currently before the Bell City Council.

On November 15, 2011 Fresh & Easy Neighborhood Market sent out a press release in which it said it plans to open 20-plus new stores from January-March of this year. The release listed just the cities the stores would been in but not the addresses.

But we had already reported on the grocery chain's early 2012 new store opening plans, including publishing a list of 28 stores Fresh & Easy was preparing for early 2012 openings. The grocer has yet to publicly announce the majority of the stores on our list. [See our story - November 15, 2011: Fresh & Easy Neighborhood Market to Open 20-Plus New Stores in Early 2012 - We Have What's Not in the Press Release. See the list of 28 stores here.

If Fresh & Easy opens 20 or more (all 28) of the stores by the end of March, that will give the Tesco-owned chain around 200-208 total stores come April Fools Day.

Tesco's fiscal year ends on February 27, 2012. We expect Fresh & Easy to closeout Tesco's 2011/12 fiscal year with no more than 190 stores open and operating.

Tesco's original plan for Fresh & Easy, which former CEO Terry Leahy continued to tout as late as fall 2010 in a meeting with some financial analysts at Fresh & Easy Neighborhood Market's campus facility in Riverside County, California - he retired at the end of February 2011 - was to have 1,000 stores open and operating over a five-to-six year period, beginning in November 2007, which is when the first Fresh & Easy stores were opened.

Four years and a couple months later, there are 180 Fresh & Easy stores.

Tesco CEO Philip Clark, who took over for Leahy in March 2011, revised that 1,000-store public relations fantasy soon after assuming the corner office at Tesco's corporate headquarters in the United Kingdom, announcing that the new plan was to have 400 Fresh & Easy stores open and operating by the end of Tesco's 2012/13 fiscal year, which ends in February 2013, at which time he says the United Kingdom-based global retailer will break-even with Fresh & Easy Neighborhood Market, which lost $112 million in the first half of this fiscal year, on sales of $470 million.

A couple months later, however, Clark announced that instead of 400 stores being needed to break-even with Fresh & Easy, the new magic number was 300 stores, which he said last year is the number of Fresh & Easy units Tesco plans to have open and operating by the end of February 2013, when the 2012/13 fiscal year ends. He said, and continues to say, Tesco will break-even with Fresh & Easy Neighborhood Market at that time, with 300 stores.

Even assuming Tesco were to have 200 Fresh & Easy units open by the end of fiscal 2011/12 (February 27, 2012), that would still mean the retailer needs to open 100 stores from March 2012 to February 2013, in order to reach the magic 300 units. It's going to be a very difficult task for the retailer to do though, considering its about double the amount of new Fresh & Easy stores Tesco will have opened by the end of this fiscal year. It's also about half the number of Fresh & Easy stores Tesco has opened since November 2007.

But, frankly, the math has been fuzzy when it comes to Tesco and its Fresh & Easy chain from day one.

We expect Tesco to report a fiscal 2011/12 loss for Fresh & Easy in the $190 million-to-$230 million range, on sales of about $1 billion. If we're correct (and even if the loss is slightly less than $190 million) that means Tesco has one year to go from that loss amount to break-even, or close to it, based on CEO Clarke's statements about breaking-even with Fresh & Easy by the end of fiscal 2012/13.

To put this in perspective, if Tesco loses $200 million on Fresh & Easy in fiscal 2011/12, which ends in a little over three weeks, it will be an improvement of just $53 million over the $253 million it lost on Fresh & Easy in its 2009/10 fiscal year. That loss was on sales of $544 million. As noted, we project sales of about $1 billion, nearly double two fiscal years' ago, for Fresh & Easy for fiscal 2011/12.

Tesco lost about $300 million, on sales of about $818 million, on Fresh & Easy in its 2010/11 fiscal year, which ended February 26, 2011. There were 164 Fresh & Easy stores open at the end of the 2010/11 fiscal year.

About $55 million of that loss can be attributed to Fresh & Easy's buyout of its produce (Wild Rocket Foods) and meat (2 Sisters Food Group) suppliers, however. If you deduct the $55 million, it still leaves a loss of $245 million for the most recently-ended fiscal year, an improvement of only $8 million over the $253 million loss in fiscal 2009/10, despite the fact sales for the 2010/11 fiscal year were about $274 million higher than the previous year.

Tesco reported a loss of $208 million, on sales of about $305 million, for Fresh & Easy in fiscal 2008/09, which was the first full-year of operations for the U.S. chain. There were 115 Fresh & Easy stores open at the fiscal 2008/09 year-end.

Fresh & Easy's loss was lower in 2008/09 ($208 million) than it was in 2009/10 ($253 million), even though revenue was $305 million in 2008/09, compared to $544 million in fiscal 2009/10. Not a good sign, as we pointed out in our analysis at the time.

On October 5, 2011, Tesco reported a half-year loss of $112 million, on sales of $470 million, for Fresh & Easy. Tesco touted the fact the half-year loss was 21-23% less than the $151 million half-year loss from the previous year. However, as we noted above, about $55 million (half being $27.5 million) of the $300 million loss for fiscal 2010/11 can be attributed to the buyouts of the two suppliers, which is also something Tesco noted in its financial reporting, saying that it explains in part why the loss was so much higher than the previous fiscal year loss.

But Tesco can't have it both ways - touting as positive a 21-23% decrease in the fiscal 2011/12 half-year loss at Fresh & Easy, over the half-year-ago same period, while at the same time using the fact it made the buyouts as an explanation for why the 2010/11 fiscal year loss ($300 million) was so much higher than the $253 million it lost in the previous fiscal year. The supplier buyouts were made in the 2010/11 fiscal year.

Instead, we suggest the fiscal year 2011/12 loss Tesco reports in a couple months for Fresh & Easy should be compared to the $253 million loss it reported for the U.S. chain for fiscal 2009/10, rather than the $300 million last fiscal year, because it's a more realistic and informative comparison.

For example, if the 2011/12 fiscal year loss for Fresh & Easy is $200 million, we will be evaluating it as a $53 million decrease (based on the 2009/10 loss) rather than a $100 million improvement over last fiscal year, because of the one-time buyout of the two suppliers, which Tesco itself said inflated the 2010/11 loss amount. We suggest you do the same if you want to get a better picture of Tesco's progress towards break-even with Fresh & Easy.

You should also compare the fiscal 2011/12 loss and revenue numbers with the annual revenue and loss metrics for the previous fiscal years detailed above.

For example, if Tesco reports sales of $1 billion, with a loss in the $190 million-$230 million range, compare that to its loss of $208 million in fiscal 2008/09, when the sales for the year were just $305 million, along with the 2009/10 metrics. Do the same regardless of the loss amount Tesco reports for Fresh & Easy in a couple months.

The point being that the annual revenue-to-annual loss spread should be decreasing much more than has been the case. As an example, If Tesco doesn't report a loss for fiscal 2011/12 that's at least half (which would be $104 million) of what it reported three fiscal years ago (the $208 million loss in fiscal 2008/09), can it really expect to go from a loss of $200 million or so this year to break-even 12 months from now?

Bottom line: It's going to be a struggle for Tesco to have 300 stores open by the end of February 2013. And it's not going to break-even with Fresh & Easy by then. If we are wrong, we will be the first to say so.

We suspect if Tesco reports a loss in 2013 of  around $130 million or less for fiscal 2012/13 (ends February 2013), it will call that a success. But even getting there is going to be a struggle, in our experience - which includes four-plus years of observing, reporting on and analyzing Tesco's Fresh & Easy closely - and analysis. It's also not break-even, or even close to it.

Related Stories

January 11, 2012: Tesco Reports 19.3% Comparable Sales Growth at Fresh & Easy Neighborhood Market For 6 Week Holiday Period

December 26, 2011: Solid Performance Gives Tesco 'Fresh & Easy' Wiggle Room - But CEO Clarke Shouldn't Sleep Soundly Every Night

December 8, 2011: Tesco Reports 11.9% Q3 Comp Store Sales Gain for Fresh & Easy ... But On Heavy Discounting

November 18, 2011: Fresh & Easy Neighborhood Market Combining Big Seasonal Foods Assortment With Promos and Discounts to Lure Holiday Shoppers

November 10, 2011: Chief Marketing Officer Uwins Out in Top-Level Reshuffling at Tesco's Fresh & Easy Neighborhood Market

October 8, 2010: 'The Insider' - Incoming Tesco CEO Philip Clarke Needs to 'Imagine' When it Comes to Fresh & Easy Neighborhood Market USA

October 10, 2011: Gov. Signs AB 183: End of Self-Service Checkout Only in California For Fresh & Easy Neighborhood Market if Stores to Still Sell Alcohol

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

October 4, 2010: Tuesday's Tesco Interim Report Offers A Road Map of Sorts For the Future of Fresh & Easy Neighborhood Market

April 19, 2011: Tesco's Fresh & Easy Neighborhood Market Posts Biggest One-Year Loss Yet - $307 Million Loss on Sales of $818 Million

March 21, 2011: Fresh & Easy Neighborhood Market Flooding its Northern California Store Neighborhoods With Margin-Busting Store Coupons

February 28, 2011: Changing of the Guard: Clarke Takes Over the Reins as Tesco CEO Wednesday

February 23, 2011: 'The Insider' - Incoming Tesco CEO Philip Clarke Visits America - And Fresh & Easy Neighborhood Market

December 7, 2010: Tesco Reports Solid Third Quarter Same-Store-Sales Growth For Fresh & Easy Neighborhood Market

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

October 4, 2010: Tuesday's Tesco Interim Report Offers A Road Map of Sorts For the Future of Fresh & Easy Neighborhood Market

April 19, 2010: Tesco Reports Fiscal 2009 Results on Tuesday, April 20; Estimated $250-$259 Million Loss For Fresh & Easy

April 21, 2009: Tesco PLC Reports Record Sales and Profits; But Takes £142 Million ($208.05 Million U.S.) Loss For Fresh & Easy Neighborhood Market USA

April 20, 2009: Tesco to Report Full-Year Financials Tomorrow; We Estimate £110-£150 Million Full-Year Loss For Fresh & Easy Neighborhood Market

September 30, 2008: News & Analysis: Tesco Reports Half-Year Financials; Reports Loss For Fresh & Easy USA and Sales Per Square Foot Averages

September 29, 2008: Tesco PLC to Report Interim Financials Tomorrow; Including Guidance on Fresh & Easy Neighborhood Market USA

September 26, 2008: Tesco PLC, Fresh & Easy and the Numbers Game; Will Tesco Release Hard Numbers For Fresh & Easy Next Week? If So, Will They Be Meaningful?

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