US venture costs Tesco £1.2bn

The group confirmed plans to pull its Fresh & Easy business in the US and reported its first fall in full-year group profits for two decades, down 52% to £1.96 billion after a series of hefty property writedowns and slowing sales growth.

Tesco insisted its UK turnaround plans were on track as it said it saw its best like-for-like sales growth for three years in its final quarter, although the 0.5% rise marked a slowdown on the 1.8% surge seen during Christmas trading.

Tesco said it was scrapping more than 100 store developments that had been in the pipeline in the UK, leaving it with a write-down of £804 million on land bought at the height of the property boom.

The group said the days of snapping up land and building major stores that led to its success in the 1990s were now behind it as shoppers are increasingly buying online.

Tesco chief executive Philip Clarke said: “The large stores we have are great and we are doing a lot of work to make them more vibrant and relevant for today’s customers, but we won’t need many more of them because growth in future will be multichannel - a combination of big stores, local convenience stores and online.”

The group also said its plans to exit the US were “well-advanced”, with interest from buyers for all or parts of the business.

Tesco said it would be at least three months before the tender process was concluded, but the group hopes to achieve a sale of Fresh & Easy as a whole to avoid redundancies among its US workforce.

The move to withdraw from the US has left it nursing a £1.2 billion impact to its bottom line, with post-tax profits plummeting by 95.7% to £120 million.On an underlying basis, pre-tax profits fell 14.5% to £3.5 billion.

Mr Clarke admitted that sales over the past few months had been impacted by the horse meat scandal as customers steered clear of frozen meat products.

Tesco had to withdraw four products from sale amid the crisis, but said the effect on overall sales was minimal and stressed that trading was now “back to normal”.

The group’s financial arm, Tesco Bank, also became the latest player to increase its bill for compensation claims relating to mis-selling of payment protection insurance (PPI), up from £30 million in the half-year to £115 million.

Its shares fell 3% after the writedowns revealed a raft of costly mistakes in recent years.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said investors were “not entirely convinced” by the group’s turnaround plans.

He added that it will be a “slow process before the company can hope to recapture its former glories”.

Tesco has been in recovery mode since falling market share and intense competition prompted the chain’s first profits warning in 20 years in January 2012. That forced Mr Clarke, who started his career stacking shelves in Tesco, to unveil a £1 billion overhaul plan in April last year.

A year on from launching the fightback, Mr Clarke said he was pleased with the progress in the UK, although trading profits in the domestic business fell 8.3% to £2.3 billion in the year to February 23.

UK like-for-like sales fell 0.4% excluding VAT and fuel over the year, despite buoyant Christmas trading as a 5% fall in general merchandise sales weighed on its performance.

Tesco said online sales reached the £3 billion milestone after rising 13% in the year.