Tesco refit provides glimmer of hope in grim Q1 results - UPDATE

5th Jun 2013 07:05

Like-for-like sales at Tesco continue to flounder, as its UK and international business suffered from the ongoing squeeze on consumer spending in the first quarter, drawing a mixed reaction from analysts.While headline group sales, excluding petrol, grew 2.7% at the FTSE 100 supermarket group, they were flat at constant currency rates and sank 2.2% on a like-for-like basis.Overall, like-for-like sales overseas fell 3.8%, hit by a stagnant Europe, continuing South Korean opening hours restrictions, and Chinese concerns about bird flu and market-wide food safety.Only two of Tesco's overseas markets showed positive like-for-like growth in the quarter, Malaysia and Hungary.Some encouragement was provided by marginal improvements in South Korea compared to the fourth quarter, while in Europe the Hungarian business returned to like-for-like growth, though very modest.In the core UK business, Tesco said like-for-like sales were held back as it pushed to accelerate the refocusing of its stores on general merchandise, but had seen encouraging results as refreshes its stores.That came against the backdrop of a good 3.4% rise in like-for-like sales at UK retailers in May, according to the latest data from the British Retail Consortium (BRC), although consumption patterns may be shifting. Research from the Voucher cloud, for example, shows that 'the frugal nature of the economy, two thirds of the UK population is now shopping at lower end supermarkets for their essentials, such as bread and milk, despite still using more up market supermarkets for luxury items like meat and fish.' The group saw a greater drag on like-for-like sales growth from the amount of space in its stores given over to non-food, which Tesco said continued to be driven by a disproportionate exposure to electronics goods and increasingly by its efforts to refocus stores from low-margin, low-growth merchandise to higher-margin, higher-growth categories. Tesco said it was working towards the first relaunch of a new core range of general merchandise in smaller stores in the next few months, to be followed by more extensive "repurposing" of general merchandise and electrical space in larger stores starting later in the year, following promising results from its initial trials.Analysts at Nomura were of a similar opinion to management and put that weak performance down to extraordinary factors, such as the re-engineering of the company's non-food offer, while calling attention to the fact that the company's lead indicators continue to improve. The group had seen encouraging results from its plan to refresh almost 200 stores this year, with a stronger than expected sales uplift in affected stores so far.Chief Executive Philip Clarke said: "Importantly to the objectives we have set out for sustainable and disciplined growth, customer perceptions are improving across all aspects of the shopping trip in the UK, driven by continued progress on our plans to 'Build a Better Tesco' and our market-leading multi-channel offer. "We have set out our plans to put customers back at the heart of the way we do business, and this is particularly evident in our recent initiatives on price and on food trust."Looking forward, Clarke added: "Whilst we are not expecting economic conditions to improve in the near term, we have a customer-focused plan for the year in each of our markets which takes this into account, and we will maintain a disciplined approach to investment and cash flow as outlined in April."Analyst James Grzinic at Jefferies said that despite a 1.8% currency tailwind the results were "slightly weaker than feared", particularly from overseas, but saw scope for "momentum to improve from here - particularly in Asia".According to Grzinic, the morning's analyst call confirmed that overall UK industry growth "was a little worse than hoped for in the quarter, with 'horsegate' an incremental challenge for Tesco". Tesco's management continued to be challenged by the City about the sustainability of the group's UK retail margin. On this, Grzinic said: "We believe Tesco's plans to reposition the business within the constraints of a 5.2% margin guidance to be a sensible course of action, supporting a suitable return on capital employed - of circa 15% post tax - for a scale business like Tesco UK, and setting out a good discipline for the industry as a whole." "Tesco reiterated a number of factors it expects to benefit from as it stabilises its domestic profit base, including further IT-driven productivity gains, a shift in non-food to higher margin (clothing versus electronics) and an improvement in overall LFL (as the horsegate impact subsides). We would add reduced rental challenges as a crucial one."Shares in Tesco were down 4.2% at 349.04p at 12:50 on Wednesday.OH