26th Jun 2015 10:51
LONDON (Alliance News) - Tesco PLC Friday reported another decline in like-for-like sales in the first quarter of its financial year, as the grocer tries to pick itself up from the difficult year it recently finished and it continues cutting prices in a deflationary UK food market.
But its results were an improvement on the immediately previous quarter and ahead of market expectations, and its shares surged following the announcement. Shares in Tesco were trading up 3.4% at 225.10 pence Friday morning, the London market's best blue-chip performer.
The UK's largest retailer reported a 1.3% drop in group like-for-like sales excluding fuel in the 13 weeks to May 30, as combined UK and Republic of Ireland like-for-like sales declined 1.5% and international like-for-likes fell 1.0%.
However, this was an improvement on the fourth quarter of the last financial year which saw like-for-like sales fall 1.8% on a group basis, 2.0% in the UK and Ireland and 1.6% internationally, and was also better than the first quarter a year earlier, when sales on the same basis fell 3.4% for the group, 4.1% in the UK and Ireland, and 1.7% internationally.
Tesco also beat the first-quarter results of its rivals among the big-four UK supermarkets, as J Sainsbury PLC, Wm Morrison Supermarkets PLC and Wal-Mart Stores Inc-owned Asda reported like-for-like sales declines of 2.1%, 2.9% and 3.9%, respectively, in the opening months of their financial years.
According to analysts at Barclays, this is the first time in at least seven years that Tesco has been able to claim quarterly like-for-like leadership of the big four.
Tesco said that the slowdown in its like-for-like sales fall is as a result of its customers responding well to the investments it is making in prices and its ranges, adding that total group sales declined 1.0%, which is the same decline as in the immediately previous quarter.
According to Kantar Worldpanel UK's grocery market data published earlier this month, Tesco came third out of the big four supermarkets in terms of sales in the 12 weeks to May 24, behind Morrisons and Sainsbury's and ahead only of Asda. In that period, Tesco's sales declined 1.3% to GBP7.28 billion from GBP7.37 billion in the same period a year before, as its market share declined to 28.6% from 29.0%.
In the face of growing competition from German discount grocers Aldi and Lidl, the big four supermarkets, of which Tesco is the largest, have been cutting prices and also simplifying their pricing structure. The retailers have been accused of confusing shoppers with deals like buy-one-get-one-free, deals that the growing discounters don't use.
At the time the Kantar data was released earlier this month, Fraser McKevitt, head of retail and consumer insight said: ?All of the major supermarkets are finding growth difficult as prices have been declining since September 2014. Yet while like-for-like groceries are 1.9% cheaper than this time last year, this is not as steep a fall as last month, when prices were down by 2.1%. This means that if current trends continue, prices will once again start rising by the end of the year.?
Tesco said it rolled out price cuts on over 300 products in the first quarter and has "seen improvements in pricing against all key competitors", as it works to "simplify its offer" by getting rid of deals such as '£5 off £40'. It said it has completed range reviews in 15 categories, reducing the number of lines by up to 20%.
When Tesco released its full-year results in April, it said that it would review each of its product ranges over an 18-month period to "simplify, further improve availability and set lower, more stable prices".
UK like-for-like volumes were up 1.4% in the quarter, with transactions growing by 1.3% as it took on 180,000 more customers, Tesco said. "This will be a volume-led recovery," Chief Executive Dave Lewis told journalists on Friday, adding that "these are positive early signs".
"We set out to serve our customers a little better every day, and the improvements we are making are starting to have an effect. We are fixing the fundamentals of shopping to win back customers and relying less on short-term couponing. Customers are experiencing better service, better availability and lower, more stable prices and are buying more things, more often, at Tesco," Lewis said in the company's statement.
"Whilst the market is still challenging and volatility is likely to remain a feature of short-term performance, these first quarter results represent another step in the right direction," he added.
Back in April, Tesco revealed that it had made a pretax loss of GBP6.38 billion in the year to February 28, as it booked a staggering GBP7.0 billion of impairments, writedowns and restructuring charges.
The retailer had been growing strongly for decades, but faced by competition from the discounters, was hit by a mounting slowdown in sales, which exposed its aggressive treatment of suppliers and forced it to admit that it had overstated profits in recent years by booking revenue too early.
Since Lewis took the helm from former CEO Philip Clarke last year, he has embarked on a massive restructuring project, selling off some of the businesses that the company had expanded into as it diversified away from its main grocery business, slashing costs, closing unprofitable stores, and cutting Tesco's spending plans and its dividend as he tried to shore up the balance sheet.
"To rebuild our profit this year, even back to the level of what we achieved last year, isn?t without its challenges," Lewis told journalists in April. "We?ve got a long, long way to go and I don?t think it will be smooth as we walk through the changes we want to make."
All three Blinkbox businesses - movies, music and books - and Tesco Broadband were sold or closed in the last financial year, and its South Korean arm and Dunnhumby customer data business are both currently up for sale.
Tesco didn't comment on the sale of the two businesses on Friday, but rumoured bidders include Google Inc and Media Giant WPP PLC for Dunnhumby, and private equity houses Affinity Equity Partners, Carlyle Group and CVC Capital Partners for the South Korean business, which is expected to fetch around GBP6 billion in the sale.
The decision to sell the South Korean business came after Tesco said in April that it was being hit by regulations that led to a higher number of enforced Sunday closures and increased restrictions on morning trading hours.
Societe Generale said that Tesco's first-quarter performance was encouraging as sales were better than expected. "The strategy is moving in the right direction but the turnaround will take time," analyst Arnaud Joly said.
Mike van Dulken, head of research at Accendo Markets, also acknowledged that Tesco's turnaround plan is "paying off and a long-awaited recovery, albeit tentative, is on the cards", adding that the 1.3% like-for-like sales decline beat the consensus of a 1.6% to 3.0% decline.
"While the sector price war continues, higher volumes in Q1 imply internal issues being resolved and its own price cuts paying off, a combination which could help the UK?s leading grocer begin to claw back some of the market share lost to the hitherto successful discounters," van Dulken said.
After the release of Tesco's results, shares in rivals Sainsbury's and Morrisons also rose, adding them to the top three best performers on the FTSE 100 on Friday morning. Sainsbury's shares were up 1.7% at 279.00 pence, while shares in Morrisons were up 1.2% at 185.20p.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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