Moody's Investors Service has changed to negative from stable the outlook on the Baa1 long-term ratings of Tesco Plc, and its guaranteed subsidiaries.
The rating action follows Tesco's announcement of its interim results for its financial year ending February 2014.
"The negative outlook on Tesco's ratings is prompted by our concerns that operational underperformance in Europe ex-UK combined with persistently soft macroeconomic growth and intensive competition will slow the improvement in the company's operational performance that we previously expected," says Yasmina Serghini-Douvin, a Moody's Vice-President Senior Analyst and lead analyst for Tesco.
According to a statement from Moody's, the change in outlook to negative from stable is primarily driven by their view that Tesco's performance continues to suffer from aggressive competition in the UK retail market and weak macroeconomic conditions across some of its key international markets such as Ireland, Korea, Poland and Thailand.
In addition, Tesco has indicated that its exposure to more discretionary items and a large store format was behind the increase in its losses in Turkey.
Moody's anticipates that a highly competitive retail environment coupled with difficult economic conditions in Ireland and Thailand and a slow economic recovery in its other markets will constrain Tesco's operational improvements in the next 12 months. As a result, the rating agency believes that it is increasingly unlikely that Tesco will improve its leverage and cash flow coverage ratios to levels that are commensurate with its Baa1 rating category.
