Tuesday 23 January 2018

Tesco reports best sales quarter in over five years with solid Christmas helping recovery

* UK Xmas underlying sales up 0.7 pct (f/cast 0.3-1.5 pct)
* Q3 UK underlying sales up 1.8 pct, best outcome for 5 years
* Sees 2016-17 group operating profit of at least 1.2 bln stg
* Shares down 2 pct, up 28 pct over last year

Tesco has been battling the rise of German discounters Aldi and Lidl,
Tesco has been battling the rise of German discounters Aldi and Lidl,

James Davey and Kate Holton

Tesco reported its best quarter of UK underlying sales growth for over five years and more growth over Christmas, continuing a major recovery in its fortunes.

Tesco, which like rivals has been battling the rise of German discounters Aldi and Lidl, said the progress it was making across the group enabled it to reiterate forecasts for its 2016-17 financial year.

"We look at the performance over the last four months and say it's another significant step in the turnaround of the business," Chief Executive Dave Lewis told reporters.

 Tesco said it was on track to deliver a group operating profit before exceptional items of "at least" £1.2bn in 2016-17, up from £944m in 2015-16.

Lewis, who has simplified and transformed Tesco's operations since joining in 2014, said that was an indication the outcome "may be ever so slightly more."

Shares in Tesco have increased 28pc over the last year, but were down 2pc by 0911 GMT.

That reflected a strong run this week ahead of the sales update and the fact that, unlike smaller rivals Morrisons and Sainsbury's, Tesco met, rather than surpassed, analysts' expectations.

"This is a good statement, albeit perhaps not good enough for the 'uber' bulls," said Shore Capital analyst Clive Black, who has a "hold" rating on the stock.

"We like the self-improvement taking place at Tesco with the management delivering higher quality and more sustainable earnings."

Analysts have expressed concern about a potential squeeze on UK consumer spending this year as inflation begins to erode real earnings growth.

"I see lots of predictions about what might happen during the course of the year. But as we speak today we wouldn't be able to point to a significant change in pattern," said Lewis.

He said grocery price deflation had, however, eased over Tesco's third quarter and the Christmas period.

"Inflationary pressure is there and in a number of categories it's been too significant to fully offset," he said, pointing to rises in the price of pork and cheese.

"Our commitment is to keep doing everything we can to minimise the impact ... Inflation is not something we welcome."

 Tesco said sales at UK stores open over a year rose 0.7pc in the six weeks to Jan. 7, in line with analyst forecasts which ranged 0.3 to 1.5pc.

That built on UK like-for-like sales growth, also reported on Thursday, of 1.8pc for the 13 weeks to Nov. 26, Tesco's fiscal third quarter - at the top end of analysts' forecasts ranging 1.25 to 2pc and a fourth straight quarter of underlying growth.

The quarter also marked a first market share gain since 2011.

Underlying UK sales had risen 0.9pc in Tesco's second quarter.

Lewis has lowered prices and improved stores, leading to more goods being sold to more customers. That in turn has allowed Tesco to agree better deals with suppliers, driving more price cuts and further volume growth - and consequently even better deals with suppliers.

By 2020, he wants Tesco to earn between 3.5 pence and 4 pence of operating profit for every 1 pound spent by shoppers, up from 2.18 pence in the first half of 2016-17, as sales rise and costs are cut through efficiencies in stores and in its distribution network.

Reuters

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