Tesco stuns the City after sales slide leads to profit warning

TESCO, Britain’s biggest retailer, stunned the City with its first profits warning in living memory yesterday, wiping billions off its share price and starkly highlighting consumer pressures.

The group revealed that sales at UK shops open over a year fell 2.3 per cent, excluding fuel and VAT, in the six weeks to 7 January in one of the toughest Christmas run-ups for the high street in decades.

Tesco, which accounts for £1 in every £7 spent at Britain’s retailers, compounded the bad sales news by warning that trading profit in 2012-13 would be flat compared with previous City forecasts of a 10 per cent rise.

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The trading update was a personal embarrassment for chief executive Philip Clarke, who took over from Sir Terry Leahy at the Tesco helm last April.

Since then a string of senior executives have announced their retirement from the supermarket giant, triggering speculation about behind-the-scenes strategic disagreements. They include Andrew Higginson, who led the retailing services division, including Tesco Bank; Lucy Neville-Rolfe, corporate and legal affairs director; and David Potts, chief executive of the Asian arm.

Clarke said he was “disappointed” with the festive performance, but that there was “much more we can do to improve our shopping trip for customers” in the coming months. As well as the company’s Big Price Drop discounting campaign introduced late last year, he said there would be “substantially increased investment” in the coming year, particularly in the UK.

Asked if he felt Tesco was in a trading crisis, Clarke said: “I feel like I’m in control. This is not going to kill us. It’s going to make us stronger.”

Analysts had forecast a sharp downturn in like-for-like sales given its heavier dependence than rivals such as Sainsbury’s and Morrisons on non-food products, but were still jolted by the scale and the profits warning for financial year 2012-13.

Tesco’s shares closed down 16 per cent, or 61.5p, at a near-three year low of 323.45p, slashing nearly £5bn off the company’s stock market value.

In contrast this week, Sainsbury’s has posted like-for-like sales up 1.2 per cent, Morrisons’ up 0.7 per cent, while M&S’s festive food sales lifted 3 per cent.

Tesco’s profits warning sparked a flurry of City downgrades of earnings forecasts. Philip Dorgan, an analyst with broker Panmure, said weakness in the UK could undermine the group’s expansion in fast-growing markets like China, and cut his pre-tax profit forecasts by 15 per cent for 2013 and 2014.

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“This is the nightmare scenario,” Dorgan said. “If the UK’s profits keep falling, then it [Tesco] will not be able to invest so much overseas, so long-term growth will slow and [financial] returns will significantly undershoot target.”

Clarke revealed Tesco was largely calling time on rapid hypermarkets expansion in future as many non-food purchases in particular had moved online. It said total internet sales in the period jumped 14 per cent. Tesco said like-for-like sales, including VAT but excluding petrol, was down 1.3 per cent – “below our expectations and disappointing”.

Like-for-like sales in general merchandise, clothing and electricals was below the same period of 2010, which the company said was disappointing given the adverse snowy weather in the run-up to Christmas 2010.