Dec 5, 2011
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Tesco's year of pain in Britain

Dec 5, 2011

Tesco, the world's No.3 retailer, could report a drop in underlying British sales for the fourth quarter in a row on Thursday, overshadowing a more solid performance in its overseas markets.

Budget Clothing Line at Tesco's Supermarket / Photo: Corbis

Store groups across Europe are struggling as shoppers' disposable incomes are squeezed by rising prices, muted wages growth and government austerity measures, and as they worry the euro zone debt crisis will plunge the region back into recession.

Tesco has suffered more than its main British supermarket rivals, in part because it sells more discretionary non-food goods where shoppers have been cutting back most.

The group, which takes about one in every 10 pounds spent in British shops, hit back in September by cutting prices.

While it is confident the 500-million-pound investment will win customers and eventually boost revenues, analysts think the short-term impact will be to depress sales.

They forecast sales at British stores open over a year, excluding fuel and VAT sales tax, in a range of down 1.0 percent to up 0.5 percent for the 13 weeks to November 26, Tesco's financial third quarter.

That would compare with a drop of 0.9 percent in the second quarter and with increases reported by rivals Asda, J Sainsbury and Wm Morrison, albeit for different trading periods.

Analysts will be looking for clues on the strength of consumer spending running into the key Christmas trading period following a string of profit warnings from companies such as French Connection, Game and Blacks Leisure.

Tesco, which trails France's Carrefour and U.S. leader Wal-Mart by annual sales, makes around two thirds of its sales and three quarters of its profit in Britain.

The group, with over 5,300 stores in 14 countries, has been relying on strong growth overseas, particularly in Asia, to boost sales and profit in recent quarters.

Analysts expect group sales to have risen by a high-single digit percentage, which would be broadly comparable with the increase posted by Wal-Mart and ahead of Carrefour and Germany's Metro.

Sales growth in Asia, however, may have been dented by flooding in Thailand, which is Tesco's second-biggest international market behind South Korea.

Tesco shares have outperformed the STOXX Europe 600 retail index by 4 percent this year. They trade at 11.3 times forecast earnings, below Wal-Mart, Carrefour and Morrison, but above Sainsbury, according to Reuters data.

Europe's No. 3 electricals retailer Kesa is expected to report a first-half loss on Wednesday, reflecting wider losses at its soon to be disposed of Comet business in the UK and weaker second-quarter trading in France.

Last month the firm, whose main business is French market leader Darty, forecast a retail loss of 11 million euros for the six months to October 31.

That compares with a retail profit of 32.4 million euros in the same period last year.

(Additional reporting by James Davey; Editing by Erica Billingham)

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