Tesco sales growth continues as Harris + Hoole sale proposed

First-quarter results from Tesco confirmed sales growth continued for the second successive period, while chief executive Dave Lewis revealed plans to sell the Harris + Hoole coffee shop chain to Caffè Nero.

Tesco recorded like-for-like sales growth of 0.9% in the 13 weeks to 28 May, with total group sales up 1.1% at constant rates thanks to a small contribution from new store openings.

UK LFL sales rose 0.3%, beating market expectations for a 0.2% rise but slower than the 0.9% growth in the fourth quarter of the last financial year.

Growth also eased to 3% for the international business, from 3.8% in Q4. Europe, excluding Turkey, was up 2.4% on a reported and at constant currency rates, while Asia grew 3.3% or 5.0% CCR.

Tesco Bank revenues were up by 3.5% as strong lending growth offset reduced credit card income.

At actual exchange rates, sales grew 1.8% including a 0.7% positive foreign exchange translation effect due to the pound's softening.

Volumes in the UK were driven up 2.2% as prices were cut, which levied a deflationary impact of circa 0.7% on total UK LFL sales.

International stores grew LFL volumes 2.7%, with transaction numbers up 1.5%, as Tesco highlighted encouraging performances in Thailand, Slovakia and Hungary.

"We have delivered a second quarter of positive like-for-like sales growth across all parts of the group in what remains a challenging market with sustained deflation," said Lewis.

He said the seven new fresh food brands were performing very well -- offering 17% savings on the cost of a typical basket of ten of the most popular meat, fruit and vegetable lines -- with over two-thirds of our customers having bought products from the new range.

"We are encouraged by the progress we are making. By growing volumes, transforming the way we work together with our suppliers, and further optimising our store operating model we are rebuilding profitability in a sustainable way."

Broker Shore Capital said the results revealed further progress in the stabilisation and recovery of the group as Lewis drives forward his major simplification programme but from the valuation perspective the shares looked fair value.

"Each quarter that goes by with sound progress is demonstrably encouraging to our minds," said analyst Clive Black.

"Whilst so, taking the investment factors outlined above into account, we continue to believe that bulls of Tesco will continue to need to be patient for material share price appreciation, the earnings numbers need to catch up with the share price a bit more, whilst the downside is limited to our minds, most particularly manifested through the much more 'par for the course' EV/EBITDA rating."

Richard Hunter at Wilson King noted that it was the first time in five years that Tesco had strung together two quarters of growth but agreed that it remained to be seen whether the optimism will percolate to the share price.

But he highlighted a number of "red flags" that remain: "Ongoing investment in the business as announced at the full year results will drag on profits, competition in the sector remains fierce and the shares are on an expensive multiple compared to its peers. In addition, there seems little sign of a dividend in the foreseeable future, which could cost Tesco new investors in this income seeking environment."

"Even so, the previously highlighted reductions in net debt and costs are complemented by strong revenue streams and there appears to be a clear line of progress emerging."

Tesco shares, which earlier in the month sank below 150p for the first time since January's multi-year low, were up 2.1% to 170p by 0835 BST on Thursday.