Tesco Sales Drop as Non-Food Slide Compounds Horsemeat Woe

Tesco Plc, the U.K.’s largest grocer, reported revenue that fell more than analysts anticipated as weak non-food sales and the horsemeat crisis halted a revival.

U.K. same-store sales fell 1 percent, excluding gasoline and value-added-tax, in the 13 weeks ended May 25, the Cheshunt, England-based company said today, compared with the previous quarter’s 0.5 percent gain. That missed the average estimate of 14 analysts in a Bloomberg News survey for a 0.7 percent drop.

Tesco said the sales decline was caused largely by having too much space dedicated to consumer electronics ahead of the introduction of a new range of non-food items. Most food categories showed an improvement, according to the company, which last year invested 1 billion pounds ($1.5 billion) in its stores, food offer and staff training to slow encroachment by discounters such as Aldi and upscale chains like Waitrose Ltd.

A weak first quarter “immediately puts pressure on the full-year outturn,” Darren Shirley, an analyst at Shore Capital, said in a note. Tesco will need to deliver same-store sales growth of 1.6 percent for the rest of the year in order to meet estimates, said Shirley, who rates the shares buy.

Tesco fell as much as 3.2 percent in London trading and was down 3.1 percent at 353.25 pence at 9:04 a.m., the second-biggest decline in the U.K. benchmark FTSE 100 Index.

Economic Stagnation

The discovery of equine DNA in four products at the beginning of the year had “a small, but discernible impact on frozen and chilled convenience food sales,” Chief Executive Officer Philip Clarke said today.

In addition, Tesco’s non-food business proved a greater drag on sales than in the previous quarter, Clarke said.

The grocer plans to reduce the space given to general merchandise in its hypermarkets and superstores and move that part of the business toward “higher margin, higher growth categories,” the CEO said on a conference call.

Tesco will “reduce our reliance on categories that take up a lot of space and don’t take a lot of money,” Clarke said. “We take about a third of the space away and rather give it to food, health and beauty and clothing.”

Same-store sales of non-food items will remain negative while the changes are being implemented and should improve toward the end of the year, the CEO said.

Still, “that doesn’t affect the margin,” as it is a “top-line drag” and the company is editing categories that aren’t profitable, Clarke said.

Market Share

Tesco’s attempts to bolster its U.K. business comes against a backdrop of economic stagnation and inflation outstripping wage growth, leaving shoppers with declining real incomes. Turning the business around “will take time,” according to Philip Dorgan, an analyst at Panmure Gordon & Co in London.

The grocer’s market share declined to 30.2 percent in the 12 weeks ended April 14 from 30.8 percent in the same period a year earlier, researcher Kantar Worldpanel said May 21.

“Tesco is a long way from being out of the woods,” Dave McCarthy, an analyst at Investec in London, said before today’s announcement. “There are many unanswered questions and difficult decisions yet to be made.”

The retailer’s profit margin is likely to come under pressure as “no retailer can suffer high like-for-like declines indefinitely without a big hit on profits,” McCarthy said.

The company didn’t comment further on its planned exit from the U.S. and said it would “update the market as appropriate.” Tesco said April 17 it would withdraw from the country about six years after it created the Fresh & Easy chain.

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