Tesco plans to "substantially" invest in embattled UK business

Tesco plans to "substantially" invest in embattled UK business

Shares in Tesco fell by more than 15% this morning (12 January) after the retailer reported another fall in UK sales and warned profits would not grow as fast as expected in its current financial year and in the next 12 months.

Tesco, which has seen its underlying UK sales fall for four successive quarters, revealed another slide in domestic sales for the Christmas period.

The retailer also warned that its profits had come under greater pressure than expected over the festive period. Annual trading profits, it said, would be "around the low end" of market expectations. Tesco also revealed plans to invest in its UK business would weigh on its profit growth in its next financial year.

Tesco reported a 1.3% drop in UK like-for-like sales, excluding fuel but including VAT, for the six weeks to 7 January. In previous quarters, Tesco's results have excluded VAT. The retailer's total UK sales, including VAT by not fuel, were up 1.7%.

The retailer said its like-for-like sales in the UK were "below our expectations and disappointing, particularly in the context of difficult weather conditions in 2010".

Tesco insisted it had "delivered a very good Christmas shopping experience for our customers" but conceded that "in a highly promotional market, the volume response to our increased investment into lowering prices did not offset the deflation it has driven".

It added: "The wider improvements in the shopping trip that are an integral part of strengthening our performance are still to work through fully."

Tesco's performance outside the UK was more encouraging. Its international sales grew by 8.2%, or 5% after currency fluctuation was factored in.

The retailer insisted it had seen "strong performances" in all three regions - Asia, Europe and "particularly" the US. Yesterday, Tesco said it would mothball 12 of its Fresh & Easy stores in the US after sales at the outlets were not high enough to keep them open.

In the US, Tesco's sales jumped 41% during the period, with like-for-likes increasing 19.3%. In Asia, sales were up 7%, although Tesco acknowledged its like-for-like sales growth was "modest" as the Thai economy recovered after last year's floods. In Europe, sales increased 2%. Like-for-like sales were up 1%, excluding fuel. Across the group, sales were up by 2.9%.

Looking ahead, Tesco cautioned that its trading profits would be at the bottom end of expectations and warned growth would be "minimal" in its next financial year.

"In a challenging consumer environment at home, and with early signs of more cautious behaviour emerging elsewhere, we have seen more strain than anticipated on our profitability during the important seasonal trading period," Tesco said. "As a result, while underlying profit before tax and earnings per share for 2011/12 will be broadly in line with market consensus forecasts, we expect group trading profit growth to be around the low end of the current consensus range."

It added: "Our plan for 2012/13 now reflects substantially increased investment to deliver an even better shopping trip for customers - particularly in the UK. Consequently, we anticipate minimal group trading profit growth for the year."

Shares in Tesco, which had fallen by 15.5% this morning, were down 14.34% at 329.8p at 09:59 GMT.

Check back for coverage of Tesco's media call later, which takes place later this morning.