Tesco's outlook changed on weaker sales in UK, Asia

Moody's anticipates that a highly competitive retail environment coupled with difficult economic conditions in Ireland and Thailand and a slow economic recovery in its other markets will constrain Tesco's operational improvements in the next 12 months. 

The change in outlook to negative from stable is primarily driven by Moody's view that Tesco's performance continues to suffer from aggressive competition in the UK retail market and weak macroeconomic conditions across some of its key international markets such as Ireland, Korea, Poland and Thailand. In addition, Tesco has indicated that its exposure to more discretionary items and a large store format was behind the increase in its losses in Turkey. 

Tesco reported a decline of 7.6 per cent in its trading profit in the first half of 2013/2014 fiscal year, the bulk of which came from its international operations.

"The negative outlook on Tesco's ratings is prompted by our concerns that operational underperformance in Europe ex-UK combined with persistently 

soft macroeconomic growth and intensive competition will slow the improvement in the company's operational performance that we previously expected," says Yasmina Serghini-Douvin, a Moody's Vice-President Senior Analyst and lead analyst for Tesco. "As a result, Tesco's debt protection ratios will likely be below our expectations and position the company weakly in the Baa1 rating category in the next 12 months."

The negative rating outlook reflects the risks that challenging prospects for the retail industry in several of Tesco's markets in Europe and Asia will offset Tesco's ongoing initiatives to improve its operating model in the UK and the benefits expected from its exit from certain loss-making businesses outside of the UK. 

Moody's recognises the decisive actions of Tesco's management to improve the company's long-term returns through exiting underperforming businesses such as its interests in Japan and the US. In China -- where the business is loss-making -- Tesco has announced that it has entered into definitive agreements with China Resources Enterprise Limited to combine the Chinese operations of the two companies. As it indicated in previous publications, Moody's believes that the creation of a joint-venture in China with a stronger local partner will give Tesco scale in an important retail market for the company. Moody's also expects Tesco to deconsolidate the losses it incurred in the US and China when these transactions complete, which will boost the company's profitability.