Tesco Lowers Profit Outlook After Holiday Sales Disappoint

Tesco Plc, (TSCO) the U.K.’s largest supermarket chain, reported Christmas sales that missed analyst estimates and reined back profit expectations after competitors’ promotions proved more popular than its Big Price Drop campaign.

Tesco fell 16 percent, the most since at least 1988, after saying profit will be at the “low end of the current consensus range,” while next year will see “minimal” growth in earnings. U.K. sales at stores open at least a year fell 2.3 percent, excluding fuel and value-added tax, in the six weeks ended Jan. 7, worse than the median estimate of 10 analysts compiled by Bloomberg for a 1 percent decline.

The retailer offered fewer coupons than competitors over the holiday as it focused on a campaign to cut the cost of 3,000 everyday items. Big Price Drop didn’t drive the improvement in volume needed to offset reduced prices, Tesco said. U.K. same- store sales have fallen for four straight quarters and Nielsen market research said that Tesco had the slowest sales growth of the four main grocers in the 12 weeks to Dec. 24.

“Recovering U.K. top-line momentum will take time operationally given it has been a problem for many periods,” said Matthew Truman, an analyst at JPMorgan Cazenove. He has an “overweight” recommendation on the shares.

Tesco dropped to 323.45 pence at the close of trading in London, extending its 12-month decline to almost 21 percent.

Supermarket Slump

The report dragged down shares of competitors. J Sainsbury Plc (SBRY) fell 5.4 percent to 285.9 pence. William Morrison Supermarkets Plc, the smallest of the U.K.’s four main food retailers, dropped 6 percent to 285.9 pence.

Delhaize Group SA (DELB), the owner of the U.S. Food Lion supermarkets, fell 11 percent to 41.78 euros in Brussels trading after reporting sales that missed analysts’ estimates and saying it will close 146 unprofitable stores.

Warren Buffett’s Berkshire Hathaway Inc. raised its stake in Tesco to 3.64 percent in September. The investor told CNBC in November he’d buy more shares if Tesco’s stock declined.

Tesco was “disappointed” with the U.K. sales performance over Christmas, Chief Executive Officer Philip Clarke said.

“In a very noisy promotional market with heavy couponing, our very strong price position just didn’t cut through as much as we’d expected,” the CEO said on a conference call.

Coupon Weakness

Big Price Drop meant inflation at the grocer was half that of the wider U.K. food-retailing market, though Clarke conceded that Tesco needs to be “stronger on promotions and coupons.”

Tesco plans to increase capital spending in the U.K. by “hundreds of millions” of pounds as it invests in better quality, range, service and prices, Finance Director Laurie McIlwee said on the conference call.

The retailer plans to open fewer larger stores in the U.K. and increase investment in Internet offerings, he said.

Clarke said he expects the business climate will be “broadly the same in 2012, I can’t see it being any better.”

McIlwee said analysts had been estimating growth of about 10 percent in trading profit and underlying profit for the year to February 2013, which he has reduced to “minimal growth.”

The retailer’s sales trailed competitor Sainsbury, which said yesterday that third-quarter same-store sales rose 1.2 percent, excluding fuel and value-added tax. Sainsbury began its Brand Match price-comparison program in October and held promotions on fuel and toys as it fought for shoppers.

Market Share

Tesco’s market share slipped to 0.4 percent to 28.9 percent in the 12 weeks to Dec. 24, according to Nielsen.

Total U.K. sales rose 3.8 percent in the six-week period, while a 5 percent increase in international sales led to 4.2 percent growth in group revenue, the company said.

McIlwee said the degree of decline in non-food sales is reducing, though still negative, with sales of 500,000 Apple Inc. iPads helping to improve that business.

“The volume improvement is good and we’ve got half the inflation of the market, but we were outpromoted,” he said.

Analysts at Shore Capital and Oriel Securities were among those who cut recommendations on Tesco stock to “hold,” bringing the totals to 19 buys, 14 holds and 5 sells, according to data compiled by Bloomberg.

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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