Tesco regains market share as fresh food offer boosts Christmas

Tesco notched an eighth consecutive quarter of like-for-like growth and its first quarterly market share gain in five years.

Over the 13 weeks to 26 November that made up the third quarter, group like-for-like sales grew 1.5%, with the UK LFL sales up 1.8%, slightly ahead of consensus forecasts.

For the six Christmas weeks to 7 January group LFL growth slowed to 0.3%, or 0.7% in the UK, with lower general merchandise sales due to not repeating a Clubcard 'Boost' promotion.

International LFLs sales declined 1.2% in the Christmas period, against growth of 0.6% in the third quarter, against a particularly strong seasonal performance last year on top of a weakening of consumer spending in Thailand.

Chief executive Dave Lewis said he was "very encouraged" by the sustained progress and third successful Christmas.

"Our fresh food ranges proved particularly popular, outperforming the market with great quality, innovative new products and even more affordable prices.

"Internationally, we have continued to focus on improving our offer for customers in challenging market conditions."

He later told reporters that he expected Tesco to meet operating profits forecasts by making "at least £1.2bn, maybe a bit more", from previous guidance of just £1.2bn.

The 19 week period ending 7th January saw group like-for-like (LFL) sales grow 1.1%. The UK delivered a strong performance, with sales up 1.4%, seizing market share in Q3 - although progress slowed over the Christmas period.

The group believes that it is on track to deliver underlying group operating profit of at least £1.2bn for the full year. The shares fell 2.2% following the announcement.

Analyst reaction

While analysts were largely positive, there was caution about Tesco's valuation and the likelihood that the supermarket price wars are unlikely to have come to an end.

Jefferies noted the "lopsided" sales versus peers, with sales slowing as others accelerated, and said assuming Tesco will consistently outperform the industry was now "more of a stretch" and its shares' underlying valuation was "pretty demanding".

Analyst James Grzinic said: "The emerging picture is one of a slowing momentum, with TSCO management confirming that the non-repetition of the 2015 Clubcard Boost impacted sales by more than planned."

Barclays analysts noted that guidance for current year group operating profit changed from “£1.2bn” to “at least £1.2bn”, which while a welcome improvement, one that appeared to have mostly anticipated given company-collected consensus is already at £1.24bn.

"Given the stage of the turnaround, current year profits are of limited relevance, in our view – the key is momentum towards its longer-term targets and Tesco’s core UK business seems very much on track at this stage," Barclays said.

"Tesco CEO Dave Lewis admission that further inflationary pressure is coming is likely to intensify this pressure with last year’s Marmitegate saga a signpost of what may lay ahead," said Mike van Dulken at Accendo Markets.

"Since 2004 we’ve seen annual retail sales growth breach 6% on just three occasions, and on each occasion after that we’ve seen a sharp slowdown, back to levels of around 2.5%. Retailers need to be prepared for that and while today’s numbers are welcome, they are no guide to what 2017 may bring to the sector as a whole."

Analyst Nicholas Hyett at Hargreaves Lansdown said the signs were that "the giant might be stirring once again", though the slowdown over the Christmas period "will leave many investors worrying whether the group can achieve sustained growth".

However, he added: "food sales seem to have performed more strongly than the wider group, something we see as key to longer term recovery. Nonetheless there are turbulent times ahead for the sector, Tesco has committed to ensuring that it 'offers customers the best possible prices', suggesting that despite looming cost inflation the price wars may not be at an end."

Richard Hunter at Wilson King said Tesco has completed the supermarket sweep after Sainsbury and Morrisons results earlier in the week, with the much publicised potential damage to the UK economy following Brexit seemingly "an area where the UK consumer seems not to have read the script".

He added: "Inevitably, some challenges remain. In the background, bond yields generally continue to put pressure on the pension deficit, the discounters may well redouble their efforts following the success this quarter of the larger players, whilst the absence of a dividend remains disappointing despite being prudent."

Retail consultant John Ibbotson at Retail Vision said that Tesco's ability to increase its market share in a period of cut-throat competition was no mean feat.

“To get Tesco to its new position of strength, Dave Lewis didn't reinvent the wheel but simply went back to basics. Tesco has reduced prices to regain competitiveness in the core UK business, rebuilt customer trust and strengthened its balance sheet by selling off non-core operations and stores.

"The latest round of restructuring is another example of Lewis future-proofing the business. Tesco still has some housekeeping to do, not least its large pension deficit, but its size will increasingly prove decisive, helping it to keep prices down for longer than its rivals and maintain its margins."