Tesco is a company with interests in more than a dozen countries: it's market leader in most. In an average year, a bad economic scenario in one nation could be reasonably expected to be balanced by a happy one elsewhere in Tesco's portfolio. But this is no average year, nor does the future look like being average either. So how hedged is Tesco overseas?
Eastern Europe looks troubled as a region, but the two nations to focus on where Tesco is concerned are Hungary and Poland.
Hungary has seen much economic upheaval already and the latest forecast from the Government is that GDP will fall by more than 5% this year. The Manufacturing Purchasing Managers Index fell to an all-time low in January. Tesco is market leader in Hungary and on our numbers will have earnt £113m of EBIT there in the year just ended. That number could be much lower in 2009/10.
Polish consumer confidence has collapsed in the past few months due to the performance of the zloty (making mortgages more expensive), and fears of worsening unemployment. We expect a lurch down in EBIT in Poland in 2009/10 also.
Before we leave Europe we should mention Ireland, where Tesco makes a similar amount of money as in Hungary and Poland. That economy has also fallen on very hard times and the retail sector is becalmed at the very best.
So there is only negative momentum coming from Europe, but will the rest of the world help? Our answer to that is a firm "no". In South Korea, interest rates have been cut five times in half a year and GDP expectations have collapsed. Japanese exports have also fallen dramatically, and Tesco could not have timed its arrival on the west coast of the US any worse. Losses there could be more substantial than the market expects.
Tesco has its problems in the UK. Like-for-like sales growth is the worst of the big four and we remain unconvinced by the marketing stance at the moment. The other members of the big four are firing on more cylinders and we are still confused by the "discounter" range. Granted, Tesco's sales densities are the highest but it's been years since Tesco was adrift in like-for-like terms. UK EBIT momentum is under pressure. Any investors who think that the overseas parts of the Tesco empire are about to bail the UK out should think again.
Jonathan Pritcard is a partner at Oriel Securities.