LONDON — The first reported financial results of the fledgling Fresh & Easy chain revealed heavy losses and modest — but improving — sales, officials of parent company Tesco here said last week.
Beset by high initial overhead and a slow ramp-up in sales performance, the 90-store chain launched by Tesco last year showed a loss of $106.8 million on around $135 million in sales for the 26-week period ending Aug. 23, Tesco officials said. The company previously had included its U.S. results along with its core holdings in the U.K.
In a conference call discussing financial results, Terry Leahy, chief executive officer, described performance at Fresh & Easy as “very encouraging,” with average sales of $11 per square foot per week, which he said exceeded industry averages. Losses, while steep, were expected, he added.
“These planned losses reflect the fact that the U.S. business — which has been trading for nine months — has been built with the necessary infrastructure in place from the beginning to support hundreds of stores,” Leahy said. “At this stage, it is therefore operating with high overhead and other costs in relation to the scale of the business.”
Observers contacted by SN last week had differing interpretations of the report. One observer, who asked not to be identified, said the sales figures compared poorly to those of Trader Joe's, the small-store chain whose success Tesco would like to emulate with its Fresh & Easy format.
“When you're building infrastructure and starting a chain from scratch, you know you're going to have losses,” the source said. “But if I'm Terry Leahy, I'm concerned about how low the sales are, even if the stores because of their immaturity are trading at only 60% or 70% of their peak ability at this time. The weakness of the sales raises questions about the expandability of this format.”
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond. Va., said the figures illustrate a long journey ahead.
“I expected them to be at a run rate of $10 million a store [annually], and they're at $6 million a store,” Wolf told SN. “Just to get from $6 million to $10 million, while comping at 15%, is still going to take four years.”
Others said the sales performance was better than they expected to hear, particularly given Tesco's learning curve in areas like advertising and brand preferences in the U.S.
“It's encouraging, and certainly much stronger than [French retailer] Carrefour, when Carrefour entered the U.S. and wound up exiting pretty quickly,” Burt P. Flickinger III, managing director of Strategic Resource Group, New York, told SN. “It's solid: 2008 may not be Tesco's year, but 2009 and 2010 could be.”
Leahy said Fresh & Easy's best stores were doing around $25 in sales per square foot per week, and stores opened since making operational improvements in the spring are averaging $13 per square foot per week.
“Some of the small adjustments we made in terms of warmer in-store ambience, introduction of some promotions, a limited number of promotions, have helped,” he said.
James Anstead, a London-based analyst at Citigroup, in a research note said the performance improvements did not sound “dramatic” since the spring. He also termed Tesco's plan to have 200 stores open by year-end as “ambitious,” given the slowdown in the real estate market.
Leahy said Tesco had a “firm plan” to expand to Northern California but did not provide a precise date for store openings there.