Tesco‘s first-quarter trading update contained a fall in UK underlying sales – and lower in LFLs in all but two of the 11 markets it now reports on. The City suggested the numbers showed Tesco has lost momentum and was facing challenges at home and abroad. Shares in the retailer were down more than 4%.

Dave McCarthy, Investec

“Tesco’s trading statement was worse than we expected. Group sales at constant exchange rates were flat (despite circa GBP3bn capex) and were only up 0.7% ex- petrol. LFLs were negative in all regions, have deteriorated since last year’s disappointing 4Q and are down over two years (i.e. LFL stores are taking less cash in the tills than two years ago).

“Management tried to explain away the disappointing performance pointing to positive customer feedback, but the proof of the pudding is in the eating. Despite heavy investment in new stores, in extra staff and in promotions, customers are still defecting to the competition. The turnaround plan is not producing tangible sales results. Pressure on margins is building, the UK is struggling and International is going from bad to worse. Tesco needs to make tough decisions in the UK and overseas, because as one sage said: ‘If you keep doing what you have been doing, you will keep getting what you have been getting’.”

Mike Dennis, Cantor Fitzgerald

“Tesco, like Morrisons and Asda, has been suffering from many customers on tight budgets trading down more to discounters and value brands. We estimate UK food LFLs are a small positive if non-food LFL is falling by 7% and tobacco by 4%. Tesco stated most food categories (except frozen and chilled ready meals) were ahead of January and February sales growth rates. While this performance was disappointing and we believe Tesco has lost UK market share, investors need to understand if the shift in sales from hypers and supermarkets to on-line and convenience is adding to incremental profits.

“International total sales growth at constant rates ex. petrol was reported up +0.7% with Asia growing at +2.8% and Europe down -3%. Asia reported LFL ex. Petrol of -3.8% and Europe reported -5.5%. Overall, International LFL ex. petrol was -4.6% which partly reflects regulatory impacts in Korea and partly weak consumer economics in Eastern Europe which more recently would not have been helped by the severe flooding. No further update was given on the Fresh & Easy exit from the US. Tesco will need to show that a move to small stores and better use of hypermarket space can rebuild sales growth going forward.”

Darren Shirley, Shore Capital

“There are no two ways about it – this is a subdued and disappointing trading update. When there are only two markets where you are reporting positive LFLs, there is no getting away from the fact that it is disappointing from a trading perspective.

“However, aside from the UK, the trends we are seeing in its international markets are already factored into our assumptions. The concern we maybe would have had around the UK was with the Q1 number being weaker than that we would be looking for for the full year. What does that imply for margin pressure? Philip Clarke was pretty robust in the analyst meeting in highlighting a number of areas that give them some flexibility on margins i.e. a raft of productivity initiatives around the supply chain. The major cause for the poor LFL performance is non-food. Food is broadly flat and probably would have been slightly positive if it wasn’t for the horsemeat impact on frozen food and chilled ready meals. The general merchandise business they are moving away from is lower margin anyway.

“I know some people around the patch are lowering numbers. They think UK margins are unsustainable; we don’t agree with them. We’re not trying to be over-bullish on the top-line number but we’re not changing numbers. Our positive stance on the stock is not based around short-term trading; it’s around the medium-term potential for this more disciplined approach to capital, what that implies for free cash flow and the potential to do more shareholder initiatives down the line. We were not expecting anything different than what came out today.”

Richard Hunter, head of equities, Hargreaves Lansdown

“The decline in like for like sales was largely anticipated, although the weakness in the international operations is more of a concern. Market share remains under pressure and will continue to be buffeted by low cost competitors. This in turn may impact margins going forward, whilst the non-food part of the business appears to be losing some momentum. More positively, the company is reporting an improvement in customer perception, the UK online business is progressing as planned and the revamp of its stores may yet prove to have the desired effect of tempting more customers into its stores.”

Matt Piner, research director, Conlumino

“These results demonstrate that the view Tesco had put the worst of its troubles behind it was somewhat premature. The horse meat furore has undoubtedly played a significant role in derailing the improving trend, just as the business was starting to once more gather momentum. This is reflected in the performance of Tesco’s food categories, where a positive and improving LFL trend was achieved in all food categories bar frozen and chilled convenience foods – in other words, those most associated with the horsemeat contamination. 

“With food having hit a hurdle, the ongoing decline of general merchandise becomes more pressing once again. Although clothing remains strong, the exposure of the business to the turbulent consumer electronics sector in particular is a major drag on performance. Tesco’s goal is to shift business from low-margin, low-growth categories to higher-margin, higher-growth categories; an admirable aim but not easy to implement. In fact, this is the crux of Tesco’s problem; its challenges are much easier to identify than they are to fix.”