Tesco struggles in Europe, admitting horsemeat effect
Tesco continues to struggle across Europe, with like-for-like sales excluding petrol down 5.5% as “tough economic conditions, challenging competitors and over-dependence upon out-of-favour hypermarkets” take their toll.
That’s according to Darren Shirley, analyst at Shore Capital, in a note to share traders commenting on the retailer’s first quarter trading statement, posted this morning (June 5).
The performance prompted BBC business editor Robert Peston in an online article to pose the question: “Has Tesco lost its mojo?”
Philip Clarke, the supermarket chain’s chief executive, reported conditions outside the UK as remaining “challenging” and Shirley cautioned: “…We harbour some growing concerns about the robustness of our UK forecasts given the weaker than anticipated trading momentum.”
‘Food is the drag’
Shore Capital analyst Clive Black noted that Tesco’s like-for-like UK food sales had been flat and added: “Interestingly in our view, the performance of food is the drag.” He also raised questions about the gentle pace of the supermarket chain’s store renewal programme.
On the horsemeat controversy, Clarke added it had “a small but discernible impact on frozen and chilled convenience food sales” for Tesco in the first financial quarter of 2013/14.
This had cast a shadow over positive and improving like-for-like sales across all other categories, and planned work on general merchandise had also held back UK sales.
In its trading update, Tesco stated: “Performance in every food category was stronger in the first quarter than in the two months of the prior year, with the exception of frozen foods and chilled convenience meals.”
‘Performance … has picked up’
However, it stressed: “The performance of these two categories has also picked up in recent weeks.”
Tesco completed nearly 1,500 tests on own-brand meat ranges earlier this year, which identified four frozen beef products contaminated by equine DNA.
The four products were withdrawn, reformulated and reintroduced, drawing on new suppliers.
Renewed level of trust
Work had been accelerated with all its suppliers to ensure technical processes and specifications could enable customers to place a renewed level of trust in its entire product range, Tesco stated.
Outside Europe, like-for-like sales in Asia fell 3.8%, sparked by shopping hour restrictions in the company’s key South Korea market, and dropped by 4.9% in China. Black questioned Tesco’s continued presence in China and Turkey.
On the positive side, online grocery sales continued to outperform the market during the quarter and clothing had also delivered strong returns.
Continued confidence
Shirley ultimately expressed continued confidence that it would pull through, posting a ‘buy’ recommendation to share traders, arguing the retailer still presented a “credible investment case”.
“However, to fulfil it Tesco needs to deliver trading stability to the UK and Europe and growth on growth in South-East Asia, online and the bank.”
Black said: “Christmas 2012 brought a little relief and possible ‘green shoots’ to suggest that things may improve.” Tesco’s strategic update in April had revealed encouraging plans, including an aspiration for steady trading profit growth and cut backs in group-wide capital expenditure, he added.
He welcomed Philip Clarke’s plans for productivity programmes in the UK, highlighted in an analyst call, particularly labour scheduling and logistics serving the south and east of England.
Tesco reported UK like-for-like sales down 1%, but group sales growth of 2.7%, excluding petrol in the 13 weeks to May 25.
On April 17, Tesco reported a pre-tax profit drop of 51% in results for the 52 weeks to February 23 – its first profit slump in 20 years – and also disclosed it would be shutting its US chain of Fresh and Easy shops.
