Grocery titan Tesco's (TSCO) woeful first-quarter trading statement raises renewed fears the supermarkets giant's turnaround isn't working. Shares cheapen 1.1% to 294.15p as the FTSE 100 retailer's worst update in a generation heaps further pressure on beleaguered CEO Philip Clarke.


Web chart - Tesco - June 2014


UK like-for-like sales excluding petrol fell 3.7% over the three months to 24 May due to weak market conditions, disruption from store refurbishments and Tesco's ongoing exit from some general merchandise categories.


The dire domestic performance also reflects a deflationary hit from hefty price reductions in the quarter and a decision to reduce levels of couponing at the till in favour of longer-term loyalty-driving scheme such as Clubcard Fuel Save.


Investors were braced for a poor update following yesterday's Kantar Worldpanel data. This showed Tesco's market share declined to 29% in the three months to 25 May, down from 30.5% a year earlier.


German discounters Aldi and Lidl are gorging on UK grocery market share, while Tesco is also losing out to upmarket food retailers Waitrose and Marks & Spencer (MKS). All this at a time when the hypermarket model is fast becoming redundant, given trends towards online ordering and top-up trips to convenience stores.


Alongside Morrisons (MRW), Asda and Sainsbury's (SBRY), Tesco has slashed the prices of essentials ranging from bread, milk and eggs, though this has yet to turn the tide against the discounters. Embattled boss Clarke also warns price cutting efforts will 'continue to impact our headline performance throughout the coming quarters and for trading conditions to remain challenging for the UK grocery market as a whole.'


He also has his work cut out with the international business. Tesco, which has completed the formation of a partnership with China Resources Enterprise (CRE) to create China's largest food retailer and a joint venture with Tata in India, suffered an 8% overall international sales slide and a 2.2% like-for-like sales decline. Headwinds included negative currency swings as well as political disruption in Thailand, though like-for-like sales were positive in the Czech Republic, Hungary, Poland and Turkey.


Analyst reaction to the Q1 figures is mixed. Deutsche Bank urges clients to 'buy' and has a 342p price target, while Jefferies has a 'hold' rating and 310p price target.


Shore Capital is sticking with its 'sell' rating on Tesco's shares. The broker writes: 'Tesco's investment proposition revolves, first and foremost, around its UK retail activities, which we forecast will account for c60% of FY2015 group trading profit. With such weak core chain trading, we retain a clear concern about further margin and so earnings erosion – either through negative operational gearing or a decision to fight for customers with more competitive pricing – and the potential for share price contraction'.

Issue Date: 04 Jun 2014