Sector movers: Food retailers hit by falling profits at Tesco

2nd Oct 2013 14:33

The food retail sector was suffering on Wednesday afternoon after some heavy falls from supermarket giant Tesco, as the company reported a fall in profits for the first half.Smaller rival Sainsbury was also trading in the red, as investors seemed underwhelmed with an acceleration in sales growth in its fiscal second quarter.Tesco, which has a market capitalisation just of around £29bn at today's prices, was trading 2.9% lower at 348.65p after reporting a 7.4% drop in first-half underlying profit before tax to £1.47bn. While group sales increased by 2% to £35.6bn, the firm said that the bottom-line weakness reflected "the effects of challenging economic and trading conditions in Europe, in addition to the impact of regulatory restrictions on opening hours in Korea".Joe Rundle, Head of Trading at ETX Capital, said that the market is now "questioning the scale" of Tesco's international footprint - poor timing in light of Tesco's agreement (also on Wednesday) with Chinese conglomerate China Resources Enterprise to combine their retail operations in China. The joint venture, which will create a multi-format business with sales of around £10bn from over 3,000 stores, will be owned 20% by Tesco.Rundle said: "Given that its businesses outside of the UK are suffering to the point where they eat up gains made by the UK operations, the market feels Tesco should consider pulling the plug on some international units, similar to its exit out of the US." Tesco was forced to sell off 'Fresh & Easy' earlier this year, its loss-making US grocery-store brand it set up in 2007.Sainsbury, the UK-focused retail chain with a market cap of around £7bn, was down 0.5% at 385.4p after reporting that sales growth increased from 3.6% to 5% in the second quarter as its market outperformance continues.Analysts at Jefferies said that like-for-like sales growth of 2% "certainly looks impressive both in an industry context and relative to strong trading this time last year". However, the broker retained its 'hold' recommendation for the shares, saying that the stock's valuation - trading 12 times calendar-2014 earnings - is "fair" given the limited scope for forecast changes.Elsewhere in the sector, Morrison - one of the other 'Big Four' supermarkets in the UK - was trading 1.4% lower at 275.8p after going ex-dividend, meaning from today investors will no longer be able to get their hands on the company's latest payout.High Street retailers Greggs and Thornton were also trading in the red today, along with cash-and-carry chain Booker.Top performing sectors so far todayElectricity 9,583.95 +1.06%Gas, Water & Multiutilities 5,669.52 +1.01%Forestry & Paper 11,202.21 +0.29%Industrial Transportation 2,987.25 +0.09%Bottom performing sectors so far todayFood & Drug Retailers 4,506.85 -2.43%Automobiles & Parts 8,028.92 -1.75%Food Producers & Processors 6,503.67 -1.41%Real Estate Investment & Services 2,546.41 -1.41%General Industrials 4,100.85 -1.40%BC