A few years ago, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) offered international growth prospects that seemed to give it a unique appeal, compared to its stay-at-home UK competitors Sainsbury and Morrison.
Unfortunately, things haven’t turned out that way, and Tesco’s overseas operations have proved a costly distraction that allowed its UK business to start losing ground to its rivals.
Tesco’s newish CEO, Philip Clarke, has wasted no time in reversing some of his predecessor’s worst decisions, and two recent news items have increased my confidence that Tesco remains a strong buy.
US exit
Tesco’s US venture was the subject of a £1.2bn write down in last year’s results, so yesterday’s news that Tesco has finally agreed a deal to dispose of its loss-making US chain, Fresh & Easy, was music to my ears.
In total, 150 of Tesco’s 200 US stores will be sold to investment firm Yucaipa Companies, while the remainder will be closed, at Tesco’s expense. Although this deal will cost Tesco around £150m, including an £80m loan to the buyers, it is a major step forward, and represents closure on the firm’s costly US misadventure.
Chinese venture
Tesco’s efforts to build an independent business in China have also been unsuccessful, but a recent announcement shows that the firm has found a better way to retain a long-term stake in this important growth market.
Tesco is in talks to combine its Chinese operations with those of China Resources Enterprise Limited (CRE), which operates 2,986 stores in China and Hong Kong. Tesco’s 131 stores mean that it would only have a 20% stake in the resulting joint venture, but the companies’ intention is for Tesco to add value to the partnership through its global buying power and supply chain capabilities.
Deutsche Bank analysts believe that CRE’s Vanguard supermarket chain is profitable, whereas Tesco’s Chinese stores are only breaking even, so the deal looks very attractive for Tesco.
A return to growth
These decisions suggest to me that Tesco CEO Philip Clarke has a clear and pragmatic vision of how to return Tesco to profitable growth.
In the UK, the firm’s turnaround plans are also progressing at a steady pace, and I believe that the benefits of these changes will start to filter through to Tesco’s financial results in 2014 — making now an excellent time to buy.
A share to retire on?
Tesco currently offers a 4.1% yield, making it a strong favourite with retirement investors.
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> Roland owns shares in Tesco but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.