Tesco U.K. Sales Drop More Than Estimated as Consumers Rein In on Economy

Tesco Plc (TSCO), the U.K.’s largest supermarket chain, said domestic sales declined for a fourth straight quarter as increased joblessness and rising fuel and food bills weighed on consumer spending.

Revenue at U.K. stores open at least a year fell 0.9 percent, excluding fuel and value-added tax, in the fiscal third quarter ended Nov. 26, Cheshunt, England-based Tesco said in a statement today. That was steeper than the median estimate of a 0.7 percent decline compiled by Bloomberg from seven analysts, and matched the second quarter’s drop.

Tesco said it’s seeing early signs of a stronger sales performance as a result of its Big Price Drop campaign. The retailer, which runs more than 2,700 stores in the U.K., cut the price of 3,000 every-day items in September and widened the program by 1,000 items on Nov. 23 to lure holiday shoppers. The campaign added almost a percentage point to food volume in the quarter, while reducing price inflation by more than 1 percent.

“The U.K. numbers are not yet good enough,” said Philip Dorgan, an analyst at Panmure Gordon. “Sales cannot even be said to be moving in the right direction yet. We believe that Tesco will eventually get it right and there are encouraging signs overseas.” Dorgan has a “buy” rating on the stock.

Tesco fell 1.6 percent to 390.65 pence at 8:08 a.m. in London trading. The stock has dropped 8.1 percent this year.

Online Revenue

“The economic headwinds aren’t making things easy for anyone, and yet the business has performed well,” Chief Executive Officer Philip Clarke said on a call to journalists. The U.K. food market is growing “at a slowing rate,” he said.

A decline in non-food sales eased in the quarter, when they fell 5 percent on a same-store basis, Chief Financial Officer Laurie McIlwee said. The improvement was helped by the Big Price Drop campaign. Online revenue now accounts for almost 8 percent of the retailer’s U.K. sales, excluding fuel, McIlwee said.

Tesco’s home and electronics departments are “doing well,” buoyed by Apple Inc. iPads and Amazon.com Inc.’s Kindle reader, while sales of CDs and home-entertainment products are “still pretty difficult,” the executive said.

In Thailand, where 165 Tesco stores had to close because of the worst floods in more than 70 years, 100 outlets are still not operating, Clarke said. Most will reopen by January, he said, adding that “things are starting to get back to normal.”

Fresh & Easy

Same-store sales growth in Asia slowed to 0.8 percent in the quarter, and eased to 11.9 percent at its U.S. Fresh & Easy unit on the same basis, from 12.4 percent in the prior quarter. U.S. same-store revenue rose almost 30 percent in the week around Thanksgiving “which demonstrates the business is really gaining traction with customers,” the CEO said.

European same-store sales increased 0.9 percent, Tesco said, an improvement on the prior quarter’s 0.1 percent gain. Growth was driven by Poland and Slovakia and its remodeled large-format Extra supermarkets.

Clarke said the Indian government’s reversal of a decision to open the nation to multi-brand foreign retailing was a “lost opportunity” and “bad for customers.” Tesco will continue a partnership with local company Trent Ltd., he said.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net

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