Tesco reports strongest sales growth in three years as turnaround plan starts to deliver

Tesco shares rallied close to 3% on Thursday after the world’s third largest retailer reported its strongest sales growth for three years for the key December period.

Tesco reported like for like sales growth of 1.8%, which was above the top end of market expectations of 1.55 and showed a good recovery from a sales decline of 0.5% in the third quarter. We should, however, remember that whilst the first segment of the fourth quarter has shown a marked bounce back, we must wait to see whether this sales strength can be continued into the tail end of the quarter and indeed throughout 2013.

Make no mistake, however, that this is perhaps one of the strongest Tesco reports in over a year on the basis that it shows that the company’s fight to turn itself around is starting to work. Momentum is the key with returning shareholder faith in Tesco’s board to turn the company around. The first stage of this momentum turn was the decision at the end of 2012 to sell all or part of the loss making Fresh and Easy US operations. The second stage is their stronger than expected Christmas sales growth reported this morning. The key going forward now is showing levels of consistency in returning to sales growth having seen a swathe of sales declines last year and this will be Tesco’s biggest challenge in a tough economic environment. In this sense, a degree of caution should be employed.

Tesco shares rallied as much as 3% to trade towards the top of the FTSE 100 performers list, hitting their highest levels since the January 2012 profit warning was issued.

Elsewhere, Marks and Spencer’s shares slumped 3.4% to be the worst performing stock on the FTSE 100 after their results – which were leaked last night after the close – showed a worse than expected decline in sales. Like for like sales of non-food items fell 3.8% in the 13 weeks to December 29, worse than median analyst expectations of a 1.5% decline. CEO Marc Bolland said “our general merchandise performance is not yet satisfactory.”

Later in the session we have the Bank of England and European Central Bank rate announcements where no movement is expected.

The FTSE 100 continues to flirt above the 6100 key resistance level where a close above this level is crucial if the FTSE 100 is to continue to trade with a bullish bias.