Reversing a rise early on, shares in Tesco (TSCO) cheapen 1.35p to 340.25p on Wednesday as the retail titan dishes out another poor set of numbers. A third quarter underlying sales fall of 1.5% calls chief executive Phillip Clarke's domestic turnaround plan into question, though the UK's biggest grocer has side-stepped further earnings downgrades.
Third quarter sales which were no worse than feared, as well as management's comfort with consensus for this year and next, triggered an early relief rally. Yet the bad news then began to sink in that despite delivering a 0.6% upwards nudge in group sales for the 13 weeks ending 23 November, Tesco continues to struggle in its core UK market.
Stripping out VAT and petrol, same-store sales decreased by 1.5% in Q3 as cash-strapped consumers continued to battle against declining real incomes. With the exception of Sainsbury's (SBRY), the Big Four UK supermarkets are losing market share to discounters Aldi and Lidl as well as high-end food retailers such as Waitrose and Marks & Spencer (MKS).
As the UK's biggest grocer, Tesco is bearing the brunt of alarmingly-weak market conditions and continuing pressure on UK household finances. This testing backdrop masked Clarke's ongoing efforts to 'Build a Better Tesco' through store refurbishments, grocery range improvements and a focus on higher margin general merchandise categories including homewares and celebration products.
Away from these shores, the £27.7 billion cap is being dogged by declining sales in some key overseas markets. A 2.9% fall in total sales in Europe partially reflected dire trading in Ireland, though better performances were delivered in Poland and Turkey. Meanwhile in Asia, like-for-like sales were sharply down in Thailand and South Korea, hit by opening hours restrictions in the latter market.
Under Clarke, the FTSE 100 retailer is becoming far more shareholder friendly and has a commitment to disciplined international growth. Its joint-venture deal with China Resources Enterprise will cap expenditure and help Tesco move more quickly towards profitability in the world's second biggest economy, while expensive forays in Japan and the US have been jettisoned.
Clarke has also called an end to the UK space race, where a slower rate of store openings and the sweating of existing assets demonstrates his determination to focus on capital discipline. His strategy entails investment in Tesco's fast-growing online grocery service and broader digital capabilities, furthered by an audacious move into the tablet market via the launch of the Hudl which has already seen over 300,000 units fly off the shelves.
Still supportive of Clarke's strategy is well-followed retail analyst Clive Black at Shore Capital, who this morning writes that 'whilst we do not hide our disappointment that Tesco cannot yet engineer a better trading performance than recorded in Q3, we believe that its strategy, valuation, yield and the promise of the benefit of economic recovery in the UK and Europe still make for a "buy" recommendation.'
Investment bank Jefferies has a 'buy' rating and 440p price target, stating that: 'Tesco's Q3 update confirmed not only the significant headwinds the group has had to contend with, but also the shape of a measured profit recovery in the coming year. We are encouraged by management's clear rebuttal of a need for a UK profit rebasing, to us this would be an unnecessary profit sacrifice.'