Looking at Tesco‘s first-quarter sales figures, it seems trading remains tough for the UK’s largest retailer. However, Tesco has only just started introducing the changes it hopes will revitalise its domestic business. That said, competition remains fierce and the fall in Tesco’s share price suggest investors are less than confident about the prospects of a recovery in the short term.
The rain was beating against the office windows yesterday morning (11 June) as we tuned into the conference call on Tesco’s first-quarter trading update and, looking at the numbers, the gloom surrounding the UK’s largest retailer has not lifted just yet. However, in many ways, that is hardly surprising.
The company reported a 1.5% decline in like-for-like sales, excluding VAT and fuel, in the UK for the 13 weeks to 26 May. The fall was, CEO Philip Clarke said, the fourth consecutive quarter in which Tesco’s underlying sales in the UK had decreased and, on the face of it, will do little to ease some industry watchers’ concerns over the retailer’s performance.
Nevertheless, Tesco pointed to signs of improvement in the UK. Like-for-like sales in the fourth quarter of its previous financial year fell 1.6%, so the retailer could cite some sequential improvement. It also referred to data from Kantar Worldpanel it said showed its performance had “improved relative to the market”.
Clarke, who remains in charge of Tesco’s UK business on top of his role as group chief executive, said the changes the retailer had made in the UK to its product range, stores and staffing was paying off. “Our customers are seeing the evidence of the changes we’re making and they’re telling us they like what they see,” he said.
However, Clarke was keen to not to suggest the worst was behind Tesco’s UK arm. “We can see momentum gathering but … I’ve got no wish to pin myself down to a precise answer,” he told reporters yesterday.
Some in the City found positives. Shore Capital analyst Clive Black said the trading update was a “relatively steady statement” with signs of “stabilisation”. He added: “We see Tesco UK as toughing it out a little more effectively than it was.”
Others were more circumspect. Sam Hart, an analyst at stockbrokers Charles Stanley, said the “jury remains out” on Tesco. “We think Tesco has a credible plan in place to revive its underperforming UK business, but the process is likely to be a protracted one,” Hart wrote. “There is also a material risk that significant additional investment could be required in the UK business beyond the GBP1bn already announced. We would not rule out the possibility that UK operating margin has to be rebased downwards again over the medium term. The current valuation suggests these risks are probably largely discounted, but the shares are unlikely to perform until clear evidence emerges of an improved like-for-like sales performance relative to peers.”
Let’s face it, Tesco was hardly going to see its LFL numbers bounce back into positive territory after just one quarter of the remedial work on its UK business. Notwithstanding the time it will take to see if these measures truly have gained traction, the UK grocery sector remains fiercely competitive as retailers battle to win over very cautious – and promiscuous – consumers. Tesco needs time to turn its UK business, which accounts for two-thirds of company profits, around. However, the retailer’s shares have lost over a quarter of their value since the start of the year, indicating investors are looking elsewhere.
On Wednesday, we’ll hear from another UK retailer, Sainsbury‘s, as it reports its first-quarter trading update. Sainsbury’s first quarter covers the Diamond Jubilee, which the retail sector had been hoping would be the first of a trio of events (alongside the Euro 2012 football championships and the Olympics) that would boost sales. However, anyone that even glanced at the Jubilee celebrations will know that, at times, it was a rather damp affair.