Shore Capital analysts Clive Black and Darren Shirley said: “Tesco has revealed what, by its own history and standards, is a disappointing and poor trading statement for the company over its third quarter.”
Group sales increased by 0.2%. UK like-for-like (LFL) sales – excluding fuel and VAT – were up by 1.6%, while total sales, including new space, was up by 0.9%, excluding fuel.
“Excluding inflation like-for-like sales, volumes are likely to be down by 3–4%, reinforcing concerns about the potential for negative operational gearing and so further grounds to downgrade estimates,” said Black and Shirley.
Particular pressure in Ireland
European sales, in constant currency, fell by 2.9%. The retailer found itself under particular pressure in Ireland, where like-for-like sales fell by 8.1%, with further falls in Hungary, where tobacco sales in large stores have been banned.
Asian sales rose by 0.5% in constant currency but China is not now included in regional sales, following its partnership with China Resources Enterprises. “Thai LFL sales were especially weak, down by 6.9%, while in South Korea the same store sales remained negative too at 4.8%,” said Shore Capital.
Despite failing to break the constraint of subdued revenue growth, Black and Shirley were relieved that Tesco’s full year expectations remained unchanged.
“While we do not hide our disappointment that Tesco cannot yet engineer a better trading performance than recorded in its third quarter, we believe that its strategy, valuation, yield and the promise of the benefit of economic recovery in the UK and Europe still make for a ‘buy’ recommendation,” concluded Black and Shirley.
Pressures on UK household finances
Philip Clarke, Tesco’s chief executive, blamed the results on continuing pressures on UK household finances during the summer.
“The actions we have taken to position the business for the future – including the work currently underway to transform our general merchandise offer and our decision to significantly reduce the amount of new space we open – are also holding back our sales performance in the short-term,” said Clarke.
But he added that customers were continuing to respond to the changes Tesco was making in its business to differentiate its offer and position as a multichannel leader.
Meanwhile, last week Tesco denied putting its suppliers under unfair pressure, after retail analyst Cantor Fitzgerald accused the retail giant of practices that risked breaching the Groceries Supply Code of Practice.
Mike Dennis, an analyst with Cantor Fitzgerald, said: “It is our view that Tesco has overstepped the mark and the situation is very difficult for many suppliers.” A Tesco spokesman dismissed the comments as “speculation”.