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  1. Analysis
January 13, 2011

Tesco’s Christmas trading: what the analysts say

Shares in Tesco fell this morning (13 January) as the grocery retailer blamed the snow for its weaker performance in its key UK market.

Shares in Tesco fell this morning (13 January) as the grocery retailer blamed the snow for its weaker performance in its key UK market. While Tesco’s overall Christmas performance was solid with a rise in total UK sales of 4.2%, like-for-like increases were seen by some analysts as “lacklustre” at 0.6%. Here is a selection of the key quotes from industry watchers.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers

“Compared to its peers and the high expectations which the company carries, Tesco has fallen short today, as reflected by the share price drop in early trade.

“Anaemic sales growth within its core UK market is a disappointment, particularly given the fact that the severe weather conditions actually provided a positive opportunity for the likes of Sainsbury’s. This comparative weakness has been seized upon by investors, which is a testament to the outperformance which the market demands from Tesco. There are, indeed, positives within the statement, such as the growth in online sales and, especially, the performance of international business where the progressive trajectory has been maintained. This geographical diversification is of benefit to the company as a whole when the core domestic market is misfiring and to some extent gives Tesco an edge over many of its rivals.

“The share price movement has recently reflected the fact that the company has yet to convince investors of the long term potential – the shares have gained just 1% over the last year, during which time the wider FTSE100 has added 11%. Even so, the size of the business cannot be ignored and as such, the general market view is that Tesco is a cautious buy.”

Neil Saunders, consulting director at Verdict:

“There is a sense of disappointment in Tesco’s numbers. At an overall level performance was solid thanks to Tesco’s aggressive space expansion, but it is concerning to see like-for-like sales weaken again. Indeed, when fuel and the influence of VAT are removed, underlying like-for-like sales are in negative territory.

“It would be unreasonable to discount the weather’s influence in some of this, but meteorological concerns are only a part of the picture: other factors are at work. Foremost among them is the degree to which the expansion of rivals, especially in non-food, is eroding Tesco’s growth potential. As the largest player, Tesco has most to lose from the physical expansion of players like Sainsbury’s.

“Tesco also suffered something of a pincer movement this Christmas. Some of its customers traded up to more premium grocers like Waitrose, Sainsbury’s and M&S while some traded down to the likes of Asda and Morrisons. This erosion almost certainly dinted growth and it indicates that Tesco needs to develop a clearer position to retain high spending customers.

“Whether these results are a blip on an otherwise unblemished record of growth or the start of a trend remains to be seen. However, in market share terms we should not forget that Tesco remains head and shoulders above everyone else in the market, it is inconceivable that it will lose that advantage any time soon.”

Nick Bubb, retail analyst at Arden Partners:

“A global giant like Tesco shouldn’t be judged on its UK like-for-like sales performance, but it will be and a like-for-like sales rise of only 0.6% is rather dull, with surprisingly weak non-food sales taking the blame, despite good toy sales (Mothercare please note). However Asia and Europe were strong. Target price 455p.”

Justin Scarborough, retail analyst at RBS Global Banking & Markets:

“Tesco had a solid Christmas with international accounting for over 50% of its growth. While the UK like-for-like may appear a tad disappointing, we believe that there are many extenuating factors behind this. As such, we believe it is business as usual with double-digit EPS for CY11F PE of 11.7x. 

“Tesco’s Christmas sales update is good at a group level but the UK like-for-like performance will grab the headlines although looking at the comps, the weather impact and the food versus non-food performance, the underlying performance was pretty solid.

“UK like-for-like rose by 0.6% (c1% below our expectations) although given the comps plus its non-food mix and larger store mix, it was always going to be difficult to be precise about forecasting this six week period. Food like-for-like was quite solid up by 1.7% but non-food like-for-like fell by 1.5%. Tesco suggest that the bad weather impacted the UK sales by c1%.

“While Tesco has over 2000 smaller/convenience stores in the UK, they only cover 16% of UK space and its c200 Extra’s which have a large non-food mix, cover over 70% of UK space. Online sales in food and non-food rose double digit with Tesco Direct registering y-o-y sales growth of 18%.”

Sam Hart, analyst at Charles Stanley & Co:

“Tesco’s brief post-Christmas trading update covering the six weeks to 8th January was slightly weaker than expected.

“Going forward, we expect trading conditions in UK food retail to remain relatively benign. The consumer environment is likely to be challenging in 2011, but customer demand should be resilient, given the non-discretionary nature of a high proportion of sales. Competition will remain intense, but we expect it to remain rational. In such an environment, we think Tesco can continue to make steady progress in the UK. In the longer term, however, we expect international, retailing services (Tesco.com, Tesco Telecoms, Dunhumby etc) and Tesco Bank to be the key drivers of earnings growth. 

“We increasingly regard the core UK food retailing business as the ‘cash cow’ being used to fund growth in these areas. The current valuation seems undemanding, given the sound balance sheet and our expectation that the company will deliver low double-digit growth in underlying earnings and dividends in each of the next three years. We would use any share price weakness associated with the slightly disappointing trading update to add to holdings. Our recommendation remains unchanged at ‘Accumulate’.”

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