Apr 18, 2010
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UK market slowdown seen clouding Tesco profit rise

Apr 18, 2010

By Mark Potter

LONDON (Reuters) - A sharp slowdown in sales growth in Tesco's (TSCO.L) main British market could overshadow an expected 8 percent rise in profits when the world's fourth-biggest retailer reports annual results on Tuesday 20 April.

A drop in food price inflation and consumer fears that taxes will have to rise to cut government borrowing following an election on May 6 have hit grocers in recent weeks.

Asda (WMT.N), the country's No.2 supermarket chain, said on Thursday 15 April the market had slowed markedly and Citi analysts believe recent industry data show like-for-like sales growth at both Tesco and Asda has ground to a halt.

Tesco often publishes its latest trading figures alongside its results, though some analysts think it might not this time.

The group, which makes about three-quarters of its profits in Britain, lagged its main UK rivals for much of the recession, but bounced back strongly in late 2009, helped by a doubling of rewards on its Clubcard customer loyalty scheme.

Tesco's underlying UK sales growth leapt 4.9 percent year-on-year over Christmas, smashing forecasts.

Data for Kantar Worldpanel, however, suggest the group slipped back again in March and investors will be looking for reassurance that this was just a blip.

While Tesco's sales growth has sometimes lagged, it has traditionally delivered industry-leading profit margins.

Analysts expect the group, which runs over 4,300 stores in 14 countries, to report an underlying pretax profit of 3.38 billion pounds for the year ended February, according to the average forecast of 13 polled by Reuters.

Trading profit is tipped to rise 13 percent to 3.48 billion pounds, while revenues, excluding VAT sales tax, are seen up 8 percent at 58.4 billion pounds.

Growth will be held back by comparison against a 53-week period last year, but will benefit from the first full-year contributions of two major acquisitions, the Homever chain in South Korea and the remaining 50-percent stake in Tesco Bank.


Tesco's results will compare favourably with bigger European rivals Carrefour (CARR.PA) and Metro (MEOG.DE), both of which reported a drop in 2009 profits, hit by falling food prices and sluggish consumer demand in continental European markets.

Carrefour said on Thursday 15 April the trading environment appeared to be stabilising and emerging markets like China were picking up, which could bode well for Tesco.

Tesco said in January international like-for-like sales had continued to improve, having fallen 3.7 percent in the third quarter and 6.7 percent in the second, excluding fuel.

Analysts will be keen to hear whether the group will say when its U.S. business will break even, and whether it will follow rivals like Carrefour and Metro in stepping up capital spending.

They also expect a further pledge to cut debt, which is seen falling about 1 billion pounds to 8.5 billion, and a new cost cutting target similar to last year's 550 million pounds.

Tesco shares have lagged the STOXX 600 European retail index by 6 percent this year and trade at 13.6 times 2010-11 earnings forecasts, below both British rival J Sainsbury (SBRY.L) and international peers Carrefour and Metro, Reuters data show.

Luxury goods group Burberry (BRBY.L) may add to hopes of a global pick up in consumer spending on Tuesday 20 April.

Analysts expect the 154-year-old maker of upmarket raincoats and handbags will report underlying revenue up 4-6 percent for the six months to March 31 after a first-half fall of 5 percent.

Associated British Foods (ABF.L) is tipped to post a big rise in first-half earnings, having already reported strong growth at its Primark discount fashion chain, while rapid growth overseas for online fashion group ASOS (ASOS.L) is seen offsetting a slightly slower performance in Britain.

(Additional reporting by James Davey and David Jones; Editing by Jon Loades-Carter)

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