Shares in supermarket giant Tesco (TSCO) slipped as the retailer reported a 2.8 per cent slump in underlying sales over the Christmas trading period, blaming the poor performance on squeezed household finances in the UK and a highly promotional backdrop.
UK like-for-like sales, excluding petrol and VAT, were down 2.5 per cent in the six weeks to 4 January, a deterioration on the 1.6 per cent fall reported in the third quarter. Chief executive Philip Clarke said tougher comparatives and weakness in the UK grocery market contributed to the decline. He added that fewer store openings and investment in general merchandise were holding back top-line growth in the short term. Weaker-than-expected trading has also forced management to abandon the profit guidance it issued in December of £3.39bn. It now expects trading profit to fall between £3.15bn and £3.41bn. But Mr Clarke insisted that investment in the UK had contributed to an "improving trend" over the period and that refurbished stores are performing better. Meanwhile, Tesco's overseas operations continued to struggle, with sales 3.6 per cent lower on last year. The biggest rate of decline was in Asia, where revenue dipped by 5.9 per cent.
Shore Capital says...
Hold. Tesco's profit forecasts issued in December have already been ditched, raising uncomfortable questions about budgeting and guidance. Following the Christmas update we have lowered our full-year trading profit expectations by £70m to £3.3bn, leading to EPS of 29.7p. We have also lowered our 2014-15 expectations by 3.1 per cent. While retaining potential to deliver medium-term free cash flow to shareholder benefit and despite undemanding valuation metrics, the cycle of downgrades persists and we're still not confident it has come to end. Therefore, we have to sit on the fence until we have greater clarity on performance and the robustness of forecasts and downgrade our recommendation to a hold.
Barclays says...
Hold. Trading around Christmas was in line with plans, but did not make up for the weak run-up. The shift of general merchandise online was also more pronounced than Tesco anticipated, which hurt its large stores. It's difficult to be certain how the rest of the fourth quarter will pan out - Tesco has easier comps, but trading has been volatile and civil unrest in Thailand has stepped up. It now seems less likely that the company can still deliver the 5.2 per cent margin target, so we cut our 2013-14 trading profit estimate by 2.8 per cent to £3.27bn, and 2014-15 estimates by 5.6 per cent. Our EPS estimates fall by similar levels.
