Tesco‘s trading update for the first quarter of its financial year included another fall in underlying UK sales and the retailer continues to face questions over its domestic performance. However, some in the City found some positives, although one surprise came from the sharp slowdown in sales growth in the US.
Shore Capital analyst Clive Black
“We see Tesco’s Q1 2012/13 update as a relatively steady statement suggesting stabilisation is coming through in the UK. Tesco is doing a lot to improve its UK performance, necessary improvement it has to be said.
“We see Tesco UK as toughing it out a little more effectively than it was. We make this assertion based upon the narrowing of Tesco UK’s relative trading performance versus the market although we cannot say, and we do not believe that Tesco’s management is stating, that minus 1.5% LFL sales is anything to positively shout about. Accordingly, there is much to do to make Tesco UK a more competitive business on a sustainable basis but Mr. Clarke, as CEO of Tesco UK as well as the group, is bringing new focus and energy.
“We see the UK trading position as in-line with our expectations with a slightly better out-turn in its core international markets although the slowdown in like-for-like sales at Fresh & Easy in the USA is more than we anticipated, which will add further pressure on the California team to our minds. This Q1 trading performance is a body blow from a LFL sales perspective that concerns us and tests our resolve to a greater and more worrying degree. If there is more slippage in Fresh & Easy’s profit performance this financial year then the calls for an exit will understandably gain even stronger support.”
Richard Hunter, head of equities, Hargreaves Lansdown Stockbrokers
“The rising market tide, which has lifted all boats this morning, has masked a fairly uninspiring Tesco update. Realistically, this is a marathon and not a sprint for Tesco.
“UK sales dipped in line with estimates, whilst the fierce competition in the sector is in sharp focus at the present time given the wider economic challenges. As such, Tesco’s market share figure remains under pressure, and the US arm’s recent growth also showed some signs of slowing. More positively, the company seems to be attacking the six-point strategic plans aggressively, whilst the more general international operations made a positive contribution.
“The amendments it is making to its business model will take time to implement and wash through. However, investors are currently quite impatient and have been searching for opportunities elsewhere, as evidenced by the 24% drop in the share price over the last six months, as compared to a 2% fall for the wider FTSE100. Today’s update is unlikely to change the situation dramatically, such that the market view of the shares as a hold, albeit a strong one, will probably remain in place.”
Conlumino MD Neil Saunders
“One message comes through loud and clear: there is no quick fix solution to the issues with Tesco’s UK business and a tremendous amount of work still remains.
“Although Tesco has made a start on its ‘six point plan’ and evidence of this – such as its re-launched Value range – is showing in stores, this will take time to drive changes in consumer behaviour. Moreover, a great deal more change is still required across other aspects of the proposition, including store refurbishments, customer service initiatives, and brand and product refreshes across other parts of the range.
“Unhelpfully for Tesco, all of this is being done against a backdrop where – the anomaly of the Jubilee period excepted – sales growth in food is sluggish and the predominant trend is for consumers to trim back. In our view this means that growth and returns flowing from new investment will probably take more time to materialise than would have been the case a few years ago. Nevertheless, there is no avoiding the fact that Tesco needs to shell out if it is to protect its UK business from long-term decline.
“On the international front, there are some worrying signs that, as a whole, performance is also slowing. This is especially so in Europe where total sales growth has slipped into negative territory since the last quarter. Our concern is that along with the UK and the US operation, which although improving remains a challenge, Tesco appears to be fighting battles on a number of fronts.”