Tesco Tumbles, Buffett Bounces

Source: http://www.tesco.ie/press/images/high/Tesco%20basket.JPG

Source: http://www.tesco.ie/press/images/high/Tesco%20basket.JPG

London Stock Exchange filings show that billionaire investor Warren Buffett lessened Berkshire Hathaway Inc.’s (NYSE: BRKA) (NYSE: BRKB) stake in Tesco Plc on October 16. Berkshire Hathaway now has a 3.98 percent stake in Tesco, compared to 4.98 percent. Cash-wise, Buffett is taking 300 million pounds ($484.75 million) out of the company. The mid-October filing follows Tesco’s release of its lackluster interim results in early October. Tesco is involved in numerous retail ventures, including groceries, gasoline, clothing, and furniture.

Tesco, Reuters says, has been involved in an 1 billion pound attempt to turn around sales. However, the company still lags behind similar company’s, like J Sainsburys plc‘s Sainsburys stores, in sales results.

In the interim results, the decline in sales was attributed to: “Challenging external conditions have held back our trading performance, particularly in Europe. Overall economic growth has seen further declines in some of our largest markets, such as Ireland and Poland, with consumer confidence still tracking at historically low levels.”

In an interview after the results were released Tesco CEO Philip Clarke said that, “The Eurozone’s going to be a challenge for everybody for a few more years, at least that’s what’s forecast.” But he remains optimistic the company will see growth in the second half. All retailers, Clarke believes, have been hit, and when the economic conditions improve, so will business.

Interbrand, a global brand consultancy evaluates Tesco as losing 2 percent of its brand value for the fiscal year ending February 2012, but had an optimistic outlook for 2013. The company rated Tesco as the top UK retailer, ahead of out-preforming brands, like Walmart’s (NYSE: WMT) Asda because, in spite of set backs, Tesco still led the UK grocery market. It believed in the brand’s resilience, much like the CEO.

If the company is optimistic it can continue to diversify an already wide range of services offered, and Interbrand is confident the retail giant can bounce back, why did Warren Buffet reduce his holdings? It may be because of the unimpressive results, despite the cheery outlook, or it may be that Tesco will soon officially no longer be operating in the U.S.

The report announces the final stages of the sale of Fresh & Easy — Tesco’s attempt to enter the U.S. market– stating that the total cost of their exit from the U.S. will be no more than 150 million pounds ($241.98 million). The stores are being sold, through Chapter 11 bankruptcy, to Yucaipa Companies, an investment firm owned by Ron Burkle. Fresh & Easy stores opened in 2006 in the Southwestern U.S., Reuters reports.

2006 is not only the year of Tesco’s ill-fated foray into the U.S. It is also the same year that Berkshire Hathaway bought a stake in the company. Reuters reported that back in 2006 when the stores opened, the British chain was seen as a potential rival to Walmart. However the stores did not experience the success forecasted. Buffett may simply be lowering Berkshire’s stake in Tesco as it removes itself from the U.S. market.

On the other side of this coin is Walmart’s expansion into the UK. ASDA, according to Interbrands, is the second largest grocer in the UK, and is diversifying its offerings like Tesco plans to do. Interbrands rated the company fourth in UK brands.

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