Tesco recovery in doubt as UK sales resume slide

By James Davey

LONDON (Reuters) - Tesco, the world's No.3 retailer, posted a drop in quarterly underlying sales in its main British market, resuming a trend seen for most of the past three years and raising doubts about its 1 billion pound turnaround plan.

The supermarket group said on Wednesday it had suffered from weak demand for general merchandise as cash-strapped Britons cut back on discretionary purchases in a flagging economy, as well as fallout from Europe's horsemeat food contamination scandal.

Retailers across Europe are struggling with subdued consumer spending. Tesco, which makes about two-thirds of its revenues in Britain, has struggled more than most, in part because it sells a higher proportion of non-food goods than other grocers and also because of years of underinvestment that saw it lose ground in Britain to rivals like J Sainsbury and Asda.

Chief Executive Phil Clarke has tried to rectify that by investing 1 billion pounds on more staff, new food ranges, revamped stores and lower prices.

But the group said on Wednesday sales at UK stores open over a year, excluding fuel and VAT sales tax, fell 1 percent in the 13 weeks to May 25, its fiscal first quarter.

That compared with analysts' forecasts for a fall of 0.5 to 1 percent and came after a rise of 0.5 percent in the fourth quarter of the 2012-13 year, which was Tesco's strongest quarterly outcome in three years.

"These results go to show that, even with 1 billion pounds to throw at it, there are no guarantees," said John Ibbotson, director of retail consultants Retail Vision.

At 0840 GMT, Tesco shares were down 3.2 percent at 353 pence, among the biggest falls by a UK blue-chip stock. They earlier touched a four month low of 348.1 pence.

EBB AND FLOW

Despite the fall in underlying UK sales, Clarke told reporters his recovery plan was on track.

"What we're in to is long term sustainable growth. It's going to ebb and flow over a quarter but the direction of travel is the right direction," said Clarke, a Tesco lifer who began his career with the grocer aged 14, stacking shelves in a store managed by his father.

Clarke said he was not expecting UK economic conditions to improve in the near term, despite an industry survey on Tuesday showing retail sales rebounded in May.

He forecast non-food like-for-like sales would remain negative in the 2013-14 financial year, but stressed it was a "top line" rather than a "bottom line" drag.

Tesco was reducing its exposure to weaker categories like consumer electronics, and increasing its focus on higher growth, higher margin categories like clothing, he said.

Analysts estimate Tesco's non-food underlying sales in the UK fell by a high single-digit percentage in the first quarter. Food sales, meantime, were hit by the discovery across Europe of horsemeat in products labelled as beef. Tesco was one of several firms forced to withdraw some goods and apologise to customers.

Phil Dorrell, director of retail consultancy Retail Remedy, said Tesco needed to improve its marketing to win back shoppers.

"Its TV campaign is insipid, its in-store marketing is muted and its promotions don't land with the fanfare of those of other retailers," he said.

Last month, Britain's No.4 grocer, Wm Morrison, posted a 1.8 percent fall in first-quarter underlying sales, while No.2 Asda reported a 1.3 percent rise, albeit for different trading periods. No.3 J Sainsbury has a trading update on June 12.

Tesco's problems are not confined to Britain. Though total international sales rose 5.5 percent, the outcome was helped by favourable currency movements.

Like-for-like sales, excluding fuel, fell 3.8 percent in Asia, hit by restrictions on trading hours in South Korea, Tesco's largest overseas market.

They also fell 5.5 percent in its continental European markets, hit by recession and stiff competition.

Tesco, which trails France's Carrefour and world No.1 Wal-Mart by annual sales, makes about 12.5 percent of its group revenues in continental Europe. In April, the firm confirmed it would exit the United States.

(Editing by Kate Holton and Mark Potter)

Source: http://news.yahoo.com/tesco-reverts-quarterly-sales-decline-uk-061228436.html

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