Tesco recovery boosted by strong UK Christmas sales

Tesco reported positive underlying sales growth in the run-up to Christmas, the latest sign of a revival for the grocer as it increased its market share for the first time in more than five years.

Britain’s biggest supermarket chain reported like-for-like sales growth of 0.7 per cent in its core UK business in the six weeks to January 7, and 1.3 per cent growth for food, in line with analysts’ expectations.

Overall like-for-like sales during the holiday period were dented by the scrapping of a loyalty card promotion, but the company reported a “strong performance” in clothing and toy sales, which were up 4.3 per cent and 8.5 per cent, respectively.

In a trading statement on Thursday, Tesco also posted strong growth figures for the third quarter in its core business, with like-for-like sales growth of 1.8 per cent in the UK fuelling its first quarterly market share gain since 2011.

However, same-store sales in the grocer’s international division were down 1.2 per cent in the Christmas period and up 0.6 per cent in the third quarter, missing analysts’ expectations.

Shares in the FTSE 100 company fell more than 2 per cent in the first hour of trading on Thursday, to 204p per share, with analysts pointing to the disappointing international results to explain the sell-off.

Bruno Monteyne, a senior analyst at Bernstein, also said that while Tesco had met analysts’ expectations, investors may have been disappointed given the better than expected results from rival UK supermarkets.

This week, Wm Morrison raised its profit guidance after reporting its strongest sales growth in seven years over the Christmas period, buoyed by a new range of premium products and improved technology for restocking its shelves.

J Sainsbury also beat analysts’ expectations with a 0.1 per cent increase in like-for-like sales, thanks to a standout performance in its clothing business, which posted a 10 per cent uptick even as high street apparel chains suffered.

But Dave Lewis, Tesco chief executive, said on Thursday that Tesco’s results indicated “sustained strong progress” for the supermarket chain and that the company was on track to deliver “at least” £1.2bn in operating profit for the full year, a slight upgrade from the company’s previous guidance of £1.2bn.

Analysts credit Mr Lewis, who took over the supermarket chain in 2014, with turning around Tesco’s business by sprucing up stores, hiring extra staff and slashing prices to stave off competition from groups such as the German discounters Aldi and Lidl.

Mr Lewis said on Thursday that the retailer was positioned for further growth and improvements.

“We are well-placed against the plans we shared in October to become more competitive for customers, simpler for colleagues, and an even better partner for our suppliers, whilst creating long-term value for our shareholders,” he said.

Tesco has said it plans to return to an operating margin of between 3.5 and 4 per cent by 2020, from 2 per cent in 2016. The company has targeted £1.5bn in cost savings, significantly more than the £500m in efficiencies it says it has found over the past two years.

This week, Tesco announced it would eliminate 1,000 jobs as part of plans to close two of its distribution centres. The grocer said it would shutter its Welham Green and Chesterfield distribution centres, resulting in more than 650 job losses, while cutting another 350 management roles. However, Tesco said some of the job losses would be offset by plans to add another 500 employees at distribution centres in Reading and Middlesbrough.

Tesco surprised the market last week by announcing that Richard Cousins, a non-executive director and chief executive of Compass, had resigned “with immediate effect”.

On Thursday, Mr Lewis denied there were any boardroom disagreements with Mr Cousins, but said of his departure: “It wasn’t what we wanted to have happen.”

“We agreed at the time that we wouldn’t communicate anything further,” he added.