Tesco UK sales continue to fall

Like-for-life sales growth has continued to fall at the UK’s largest retailer, Tesco (TSCO.L), in the first quarter of 2012 as the tough economic environment hits consumer spending.

UK sales growth dropped 1.3 percentage points to 2.4% (down from 3.7% growth in the fourth quarter) in the 13 weeks to the end of May, while European sales grew a weak 0.4%. 

The group blamed the eurozone debt crisis for ‘very low consumer confidence’ in Europe and has embarked on a revamp of its UK stores in a bid to hold on to customers.

Its Asian supermarkets are now driving growth, with a 9.1% rise in sales as Thailand and South Korea gave a strong performance. China’s like-for-like sales also fell against a weak economic backdrop.

The announcement follows the group’s shock profit warning issued in January after poor Christmas sales. Chief executive Phil Clarke forecast operating profits for 2012/13 to be flat, rather than the expected rise of 10%.

In April it launched a £1 billion makeover of its existing stores and website after the group conceded that in the race for competitive pricing it had taken 'a little bit too much away from the shopper'. Clarke also gave up his £372,000 bonus in response to the poor results.  

A number of top fund managers sold the stock following the profit warning, including Neil Woodford, who said he had ‘placed too much confidence’ in Tesco’s ability to deal with the economic headwinds.

In some happier news, the group also reported its biggest boost outside the Christmas period in the run-up the Diamond Jubilee, with over £1 billion in sales. Those sales will be included in the next quarter’s results.

Like-for-like UK sales excluding VAT and petrol fell by 1.5% over the quarter. Group sales, meanwhile, rose 2.2% over the period.

Analysts at Seymour Pierce downgraded their target price from 350p to 320p this morning, and kept their ‘hold’ stance on the stock. Shares slipped 1.2p or 0.5% to 301p in Monday morning trade.

Freddie George, retail research analyst at Seymour Pierce, said: ‘We continue to believe that Tesco is still a strong business with an unassailable market-leading position in the UK that has temporarily come off the rails… Nevertheless it is hard to see anything other than pedestrian earnings growth from the company over the next three years.

‘UK profits are unlikely to grow while the company has to invest in its proposition to defend market share and overseas, which still only accounts for about 25% of operating profits, will not significantly move the dial.’