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Wal-Mart Stores, Inc. (WMT), Tesco PLC (TSCO): Is The Worst Over for Warren Buffett-Backed Grocer?

Wal-Mart Stores, Inc (NYSE:WMT)In the cutthroat grocer business, a vote of confidence from a big-time investor goes a long way. If that vote of confidence comes in the form of a billion-dollar investment from Warren Buffett, then it becomes a saving grace. U.K.-based grocery giant Tesco PLC (LON:TSCO) has faced difficult headwinds in recent years, losing market share to competitors and navigating an anemic European economy. Its U.S. branch, called Fresh & Easy, caused company profits to drop 96% and led management to pull the curtains on the five-year-old chain. For Tesco, there’s plenty of bad news, but many investors still have faith that the Oracle of Omaha sees something here. Should you be looking at Tesco?

Do you know Tesco?
Though not a household name in the United States, Tesco PLC (LON:TSCO) is the largest retailer in the United Kingdom. It is a behemoth of a company — many times the size of Whole Foods Market, Inc. (NASDAQ:WFM) and Safeway, or any other U.S. grocer, with the exception of Wal-Mart Stores, Inc. (NYSE:WMT). It may be in part that Tesco resembles a smaller, younger version of the latter that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) owns more than 5% of the outstanding shares. Buffett often talks about his biggest mistake in investing — not buying Wal-Mart Stores, Inc. (NYSE:WMT) in the ’80s because it was a few cents more than he wanted to pay. The cost to shareholders over time, he says, is in the billions. So perhaps this is an effort to right one of his few mistakes in the past.

For others, though, Tesco PLC (LON:TSCO) has been a troubling company in recent years. This past year showed a continued struggle, and members of management has gone as far as to cut their own bonuses for the period as an apology for performance.

Profits are down for the first time in years, and the company’s U.S. experiment has, for now, failed. But what lies ahead for Buffett’s grocery store?

Management has reversed course on a multiyear expansion plan. The race for space has stopped as the company realized that smaller-format stores and online sales will probably drive growth going forward. As reported by Bloomberg, the company’s expansion plans for the past few years were largely based on the economic and technological environment several years ago — before much of the innovation and change in trends that have recently taken hold.

This means a few important things for the company and its shareholders. Tesco PLC (LON:TSCO) is scrapping 100 major store projects in favor of expanding its Express format — adding a total of 1.26 million square feet this year, as opposed to 1.3 million last year. The company is also going to focus on refining its online sales platform — spending $750 million in global development.

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