Tesco U.K. Sales Barely Grow on Lower Inflation, Tax Outlook

Tesco Plc, the U.K.’s largest supermarket chain, said domestic revenue barely grew in the first quarter as inflation eased and shoppers balked at the prospect of higher taxes.

Sales at U.K. stores open at least a year rose 0.1 percent, excluding gasoline and value-added tax, in the 13 weeks ended May 30, the Cheshunt, England-based retailer said today. That was less than the 2.7 percent growth the company reported for the second half of the previous year and missed the 0.4 percent median estimate of six analysts surveyed by Bloomberg News.

U.K. food price inflation slumped to 1.4 percent in the three months through May 16, having reached 9 percent in February 2009, according to Kantar Worldpanel. That’s eroded sales growth at Britain’s supermarkets, which also are having to contend with weaker consumer spending. Prime Minister David Cameron said last week that the budget squeeze will come to “affect every single person in our country.”

“We are concerned on three fronts: poor industry same-store sales, weak consumer spending and a doubling of capacity additions this year,” Dave McCarthy, an analyst at Evolution Securities in London, said in a report before the release. “Tesco’s answer to slowing sales seems to be to open even more space, but this is likely to lead to an accelerating fall in returns.” McCarthy has a “neutral” rating on the stock.

New Chief

Tesco announced last week that Phil Clarke will replace Terry Leahy as chief executive officer in March. The retailer is extending non-food space and rewarding customers with double Clubcard loyalty points in an effort to boost 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, driven by store openings in Asia. International same-store sales were little changed in the quarter, with some declines in Asia offset by gains in Europe.

Tesco fell 2.5 pence, or 0.7 percent, to 391.65 pence in London trading yesterday. The stock has declined 8.5 percent this year, compared with smaller competitor J Sainsbury Plc’s 1.2 percent drop.

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