Moody’s has increased the pressure on Tesco but cutting its rating on the UK’s largest retailer.
The ratings agency slashed Tesco’s long-term debt from Baa2 to Baa1.
The move follows Standard & Poor’s decision to change its outlook on Tesco to negative in April and comes shortly after the firm reported a first quarter drop of 3.8% in sales at stores which had been open for more than a year.
The numbers were the worst under chief executive Philip Clarke and he admitted he could not recollect a trading period so bad in more than 30 years.
‘The first quarter has also seen a continuation of the challenging consumer trends in the UK, reflecting still subdued levels of spending in addition to the more structural changes taking place across the retail industry,' he told the market at the time.
However, Moody’s does not give much hope for Clarke to turn things around in the near term.
It believes the price war in the UK will continue to have a detrimental impact on the firm, along with falls at its out-of-town stores amid the growth of online shopping.
It said: ‘Moody's believes that Tesco's UK profit margin is likely to deteriorate below the level seen in the second half of fiscal 2013-14 because of (1) the further deterioration in like-for-like sales performance in first quarter of fiscal 2014-15, with a 3.7% decline (excluding petrol) in the UK; and (2) Tesco's own expectation that headline performance will remain affected by a lower level of untargeted coupons, price cuts and store refresh programme through the coming quarters.’
In response Tesco said: “Moody’s announcement reflects the challenges for the sector as a whole, and the impact that they expect this is likely to have on our near term performance.
‘However, they also acknowledge we have a plan to address structural challenges in the sector and we remain market leader both overall and in online and convenience which are critical to future growth.’