Tesco Sees U.K. Sales Growth Reviving After Tough First Quarter

Tesco Plc, the U.K.’s largest supermarket chain, said a lack of domestic revenue growth in the first quarter won’t stop it meeting full-year forecasts.

Sales at U.K. stores open at least a year will still gain 3 percent, excluding gasoline and value-added tax, after rising 0.1 percent in the 13 weeks ended May 30, Finance Director Laurie McIlwee told reporters on a conference call today. An acceleration of food-price inflation and reduced concern among consumers about the British budget and new coalition government will help sales as the year progresses, he said.

U.K. food inflation slowed to 1.4 percent in the three months through May 16, having reached 9 percent in February 2009, according to Kantar Worldpanel. That eroded sales growth at Britain’s supermarkets, which are also contending with weaker consumer spending. Tesco’s same-store sales growth slowed from 2.7 percent in the second half of the previous year.

“The U.K. performance was expected and should be the low point of the year,” Chris Hogbin, an analyst at Bernstein Research said. “We also expect international performance to accelerate.” Hogbin has an “outperform” rating on the shares.

Tesco rose 8.25 pence, or 2.1 percent, to 399.9 pence at 1:42 p.m. in London trading, reversing earlier losses. The stock has declined 6.6 percent this year, compared with smaller competitor J Sainsbury Plc’s 0.1 percent gain.

Tesco, which announced last week that Phil Clarke will replace Terry Leahy as chief executive officer, foresees a “steady consumer recovery” in the U.K., McIlwee said.

Finest Range

The first-quarter performance was “slightly off the group’s growth rates, but still solid,” he said.

The gain in U.K. same-store sales missed the 0.4 percent median estimate of six analysts surveyed by Bloomberg News.

The retailer singled out increased sales of its higher-priced Finest range and non-food products as evidence of a recovery. Sales of high-end televisions have more than doubled, fuelled by soccer’s World Cup, McIlwee said.

International same-store sales were little changed in the quarter, with some declines in Asia offset by gains in Europe.

Business in Poland was affected as the country mourned the death of its president in an air crash, McIlwee said. In Thailand, sales were hurt by political unrest, though have “bounced back well” in the two weeks since the country lifted a curfew imposed on about one third of the population, he said. Tesco has sold about 700,000 World Cup t-shirts in South Korea.

Market Share

Tesco is extending non-food space and rewarding customers with double Clubcard loyalty points in an effort to fuel growth, and held its 30.6 percent share of the U.K. grocery market in the three months through May 16, according to Kantar data.

Total sales rose 8.2 percent in the first quarter, or 6.9 percent excluding gasoline.

“This is a solid statement and ought to reassure,” Gillian Hilditch, an analyst at JPMorgan Cazenove, said in a report. She has a “neutral” recommendation on the stock.

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