Tesco shares tumble then recover as profits slump nearly a quarter
03.10.2013 412 views
Profits at Tesco have slumped by nearly a quarter, underscoring the challenge the UK's largest supermarket faces in winning back customers. Adding to the retail giant's woes, sales were flat and lagged well behind rival Sainsbury's, which turned in a solid performance. Tesco announced it had earned £1.4bn pre-tax profits in the first half of the year – a stunning 23.5% drop that caused its share price to tumble nearly 5% in early trading. The supermarket blamed tough conditions in Europe, where like-for-like sales declined by 5% and profits slumped nearly 70%. Tesco said UK sales were flat in the second quarter, despite a £1bn investment plan to revamp tired stores. Rival Sainsbury's, the UK's third largest supermarket behind Tesco and Asda, notched up like-for-likes sales growth of 2% excluding fuel. Philip Clarke, Tesco's chief executive, said the company's UK performance was strengthening, with plans to redesign its stores gaining momentum.
He added: "The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there." Tesco's results came as the store announced a joint venture with China Resources Enterprise (CRE), where it will combine its 134 Chinese stores with CRE's 3,000 stores. The deal leaves Tesco with a 20% stake in the business, which it said would have sales of £10bn. But investors took fright at Tesco's profit numbers: its shares plummeted 5%, while Sainsbury's shares also fell 2.5%. Sainsbury's claimed it was the only major supermarket that was increasing market share. The retailer is driving growth by opening small convenience stores in city centres, as it seeks to capitalise on changing shopping habits, as more people choose to do smaller, more frequent 'top-up' shops near their homes and offices. It expects to open around 1,000 convenience stores by 2016, up from the current total of 575 stores.
Justin King, Sainsbury's chief executive, said he was confident the supermarket would continue to grow, dismissing the threat from cost-cutting rivals, such as Aldi, which announced plans to open 50 stores in the UK this year. "If we are growing our sales it gives us the flexibility to invest in our business wherever that might be – prices, service, availability and so on," he said. Shoppers were continuing to be careful with their money, he said. "Our customers tell us they that still don't have extra money in their pockets and the approach they have taken to managing their money in the downturn has continued and we expect it to continue." City watchers have questioned how far Sainbury's can translate growth into profits, but King said he expected to meet market expectations when the retailer unveils those results later this year. "The market expects us to have grown profits in the first half and we expect to meet the market expectations." Both supermarkets reported that clothing sales were up, suggesting they are eating into the highly competitive high-street fashion market. Tesco said clothing sales were up 10% in 47 stores that have been refitted with a specialised clothing department, while Sainsbury's said its clothing sales were growing twice as fast as food. The supermarket giants also reported that more customers were buying their groceries and other goods on the internet, with online sales at Tesco up 13% and 15% at Sainsbury's.