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Tesco U.K. Sales Decline Persists as Shoppers Stay Away

Tesco Plc, (TSCO) the U.K.’s largest supermarket company, said domestic sales declined for a fourth straight quarter as Chief Executive Officer Philip Clarke struggled to win back shoppers in the retailer’s main territory.

U.K. sales at stores open at least a year fell 1.5 percent excluding fuel and value-added tax in the 13 weeks ended May 26, the Cheshunt, England-based retailer said today. That matched the median estimate of 13 analysts compiled by Bloomberg, and compared with the prior quarter’s 1.6 percent drop.

Clarke said on a conference call that he’ll continue to oversee the domestic business “until further notice,” three months after assuming control of operations from Richard Brasher. The CEO said he devotes two days a week to the U.K., where Tesco has promised to invest 1 billion pounds ($1.6 billion) to arrest a slide in its market leadership. Most of that investment is still to be made, he said today. The retailer gets about two-thirds of sales from its home country.

“Tesco is still a strong business with an unassailable market-leading position in the U.K. that has temporarily come off the rails,” Freddie George, an analyst at Seymour Pierce in London, said in a note to clients. “Nevertheless, it is hard to see anything other than pedestrian earnings growth from the company over the next three years.”

Tesco was little changed at 302.5 pence at 9:40 a.m. in London trading, trailing a 1.4 percent advance in the U.K. FTSE 100 Index. The stock has fallen 25 percent this year.

U.K. Investment

The decline in sales at Tesco compares with gains being reported by competitors including J Sainsbury Plc (SBRY) and the upscale Waitrose chain. The retailer’s share of U.K. grocery spending slipped to 30.8 percent in the three months ended May 13, according to Kantar Worldpanel data.

Tesco was later than competitors to introduce money-off vouchers to hard-pressed shoppers. Clarke acknowledged that there has been a step-up in coupon activity across the market, though such a policy “isn’t a long-term solution.”

U.K. consumer confidence “isn’t getting any better” the CEO said on the call. A falling oil price is “the great hope” for shoppers, he said. The price of crude oil has declined 18 percent since April 30. Still, the cost of a tank of petrol has risen to 70 pounds from 45 pounds two years ago.

The week leading up to the Diamond Jubilee weekend was the retailer’s biggest ever, Tesco said. Prior to that, sales were hurt by a wet April and comparison with a period of last year that included national celebrations for the royal wedding.

International Sales

Sales at stores open at least a year rose 0.5 percent at Tesco’s international unit, compared with the median analyst estimate of an unchanged performance. Revenue growth at the U.S. Fresh & Easy chain slowed to 3.6 percent from 12.3 percent in the prior period, while same-store sales in both the Asian and European units increased 0.4 percent, Tesco said.

“Internationally, like-for-like sales growth proved resilient, despite slowing economic growth in China and the emerging impact of recently introduced shopping hours legislation in South Korea,” Clarke said.

The CEO defended the slowdown in the U.S. division. Three years of positive same-store sales growth in a market that isn’t growing “is pretty damn good,” he said.

Fresh & Easy

Still, Clarke said he “needs a bit more” from the Fresh & Easy business as it pushes for profitability by the year ending February 2014, and said the “biggest ever change of range” is about to hit stores this month with a new ready-meal line.

In South Korea, the CEO said it’s more than likely that all its hypermarkets, numbering more than 100, will be affected by new laws restricting opening hours from the end of July.

“It’s too early to say, but we did flag in April that we were concerned there would be a sales impact in like-for-like terms,” Clarke said. “It’s very difficult to see the government’s going to make changes” to the laws, which restrict large retailers from opening on two Sundays every month, given the combined parliamentary and presidential elections this year.

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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