Tesco's festive sales fall shy of City forecasts

Tesco reported fairly strong sales growth in the run-up to and including Christmas, though still fell slightly short of City forecasts.

For the third quarter of the 13 weeks to 25 November, Britain's largest grocery group increased like-for-like sales 2.3% in the UK and Ireland, and then for the six-week festive trading period to 6 January, saw LFL growth of 2.0%.

The consensus forecast was for 2.4% for the third quarter and was even higher for the Christmas period at 2.8%, with some analysts expecting at least 3% for both.

Fresh food contributed a particularly good performance, with sales up 3.7% in the UK, while there was more than 5% growth in online grocery sales and a record Christmas period where over 4m customer orders were competed.

Group sales, including modest growth in Europe and marked declines Asia, were up 0.9% in the third quarter and up 0.1% over Christmas. Tesco had some issues with tobacco supply in the UK as the collapse of Palmer & Harvey affected total sales.

Ireland was bright spot with quarterly LFL sales up 3.3% and 4.0% over Christmas, while the performance in central Europe was solid as Poland delivered positive LFL sales and the Czech republic and Slovakia were said to be going well.

Directors are confident in the outlook for the full year and said the group remained "firmly on track" to deliver the medium-term ambitions, which are to reduce costs by £1.5bn, generate £9bn of retail cash from operations and improve operating margins to between 3.5% and 4.0%, all by 2020.

Following full regulatory clearance of the proposed takeover of wholesaler Booker, Tesco expects to send out its prospectus in the week beginning 5 February, a shareholder vote towards the end of February and completion in early March.

Tesco shares fell 3.8% in early trading on Thursday to 203.9p, cancelling out gains made since mid December.

"We deem this performance from Tesco to be good in the big scheme of things," said analysts at broker Shore Capital, noting that the collapse of wholesaler Palmer & Harvey took a shine off the headline figures.

"As such Q3 trading is in-line with our expectations, whilst 6W Christmas trade in the UK, stripping out P&H, is a little behind, circa 0.5%, noting as we do that Tesco mentions lesser inflation than its competitors in its statement, albeit all of the supermarkets seem to make this point," analyst Clive Black wrote.

Neil Wilson at ETX Capital said there was lots to be positive about, with stronger grocery and fresh food sales offsetting the less impressive performance in general merchandise and slower tobacco.

"As with all the supermarkets, while top line growth is seen, we have scant detail on margins and inflation. Inflation is undoubtedly helping to push up sales figures, but it is less clear where margins are," he added.

"The likelihood – as Tesco suggests in its update – is that it is better able to absorb inflation and pass less on to consumers than rivals, which ought to be positive for margins on a relative basis with competitors."