Troubling Tesco

NEW YORK (TheStreet) -- While visiting England recently, I was constantly going by Tesco (TSCDY) supermarkets.

They look just like American supermarkets, huge complexes in suburban locations surrounded by parking.Tesco is one of the companies accused of killing England's "high street," its traditional downtown filled with small shops and shopkeepers, and making the country into a clone of the U.S.

So you might think Tesco was a highly profitable outfit and a big international success. You would be wrong.

As proof, look no further than the sale of its California-based Fresh & Easy chain to private-equity manager Ron Burkle's Yucaipa Companies.

Tesco is basically paying Burkle to take this dog off its hands. In fact, it's handing over a loan of $126 million in preference to just firing the 4,000 employees in 150 stores and closing Fresh & Easy's headquarters in Riverside, Calif., which include offices and a distribution center.

That headquarters in Riverside are the security on the loan, and so the worst that happens is that Burkle closes it all and Tesco gets nothing. The best that can happen is that Burkle pays off the loan.

This is Tesco's third international retreat in two years. It slunk out of Japan last year and folded its Chinese unit into a state-run enterprise this year, becoming a minority partner.

Tesco still has annual revenue of about $100 billion, close to the numbers for Kroger ( KR) and Costco ( COST).

In a good year it can bring 5% of that to the bottom line, but fiscal 2013 ended in February was not a good year. Net income "before extraordinary items" was barely 2% of revenue, and after China and Japan were accounted for, profits were less than $250 million.

Tesco was founded by London grocer Jack Cohen, known as the "Slasher" for his attitude on prices, and brought to prominence by Terry Leahy, who won a knighthood for his efforts.

The current CEO, Phillip Clarke, is unlikely to win such plaudits. He has had to deal with a scandal involving horsemeat in the company's products, and a recent consumer survey in which Tesco was called the "worst" supermarket in the country. He even lost the driving license on his Jaguar.

Fact is, Tesco is too big for its home market and obviously has trouble going beyond it. It sells about one-third of England's groceries, and has become the kind of target for English writers that Wal-Mart ( WMT)has become here.

So why is the stock up 9% this year? Possibly it's due to the success of its online shopping unit, Tesco.com, which seems to have cracked the code for selling real groceries over the Internet, at least in England. It could be the new "Tesco Extra" shops, which it calls a "destination" store - think a large Kroger but with clothes. Or it could just be that a rising tide lifts all boats, even leaky ones - the FTSE average is up 15% overall.

Whatever it is more than half the analysts following Tesco stock have it rated a "buy" or "strong buy."

Personally, I wouldn't touch it with a barge pole. I think it's a big target at home and a big failure abroad. I'd much rather own stock in Kroger or even WalMart, whose Asda chain is the nation's second-largest. Better yet Costco, of which I do own 100 shares.

At the time of publication, the author was long Costco.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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