Tesco shares fall after Q1 sales decline raise fears recovery is stalling

<p>Shares in Tesco, the world’s third largest retailer, fell by 2.5% within the first 25 minutes of trading on the London Stock Exchange after the […]</p>

Shares in Tesco, the world’s third largest retailer, fell by 2.5% within the first 25 minutes of trading on the London Stock Exchange after the firm reported a deeper than expected fall in sales for the first quarter.

Sales at stores open more than a year excluding VAT and fuel fell by 1% against analyst forecasts for a fall of 0.7% and having risen by 0.5% in the previous quarter. This comes despite the firms claims that customers have embraced its ‘Price Promise’ campaign. Total sales excluding petrol rose 2.7% for the quarter.

The immediate fears will now be that the recovery is stalling. The retailer has spent £1bn in a turnaround plan and a refocus to its core UK market after failed growth plans abroad including the US where it failed to make a profit.

But is now the time for investors to get concerned about Tesco’s recovery plan stalling?

The first quarter saw non-food item sales such as clothing, DVD’s and electrical equipment have a bigger effect on like for like sales that the previous quarter. Tesco claims that this is being driven by its ‘disproportionate exposure to consumer electronics.’

This is of course no surprise. Average weekly wage growth in the UK recently halved to 0.4% in the three months to March this year on an annual measure, compared to inflation at 2.4%. The problems at Tesco are not all of their own making. Consumer spending power is significantly reduced as a result and this is turning Tesco’s customers away from high priced electronic goods. At the same time, most food categories showed an improvement.

Tesco is trying to bring back a sense of product and operational efficiency. The firm recently wrote down the value of its property portfolio and is shifting from low margin, low growth goods to high margin, high growth categories. Clothing, the company says, has had a successful quarter whilst they are also launching a new ‘core’ range of general merchandise in smaller format stores in the next few months, followed by a similar roll out in larger stores later this year. They are essentially in a testing phase before widening exposure and cost.

Internationally, the picture is bleak. In Asia, like-for-like sales fell by 3.8% thanks in part to regulatory restrictions in Korea on store opening hours but does mark a small pick up from a deep fall in Q4. China like-for-like sales were affected by the bird flu crisis whilst in Europe sales fell by a whopping 3% at constant rates.

There was further disappointment from the fact there remains no definitive update on the firms exit from the US, despite claims that the exit remains ‘on track.’ A degree of transparency on this exit would have been valued by investors who will now inevitably focus on the deeper than expected decline in sales for the quarter.

So is it time for Tesco shareholders to jump ship?

I think that’s premature and further evidence of stalling is needed but certainly there are significant concerns against a backdrop of a very tough consumer market, anaemic wage growth and high inflation. In truth Sainsbury’s – who has outperformed the market for the last two years – are no longer having it their own way having forecast like-for-like sales growth for this year of 1% to 1.5%, which disappointed the market.

Tesco’s shares have fallen by almost 9% in the last week alone to hit a new four month low this morning. Shares are now trading just above its 200 day moving average which resides at 350p. A break below this would indicate a loss in shareholder faith and would escalate concerns.

What the recent falls do show is that the turnaround cheers that have lifted the stock price have been overdone (shares rallied 32% from the June low in 2012) and the adrenaline is now waning and a sense of ‘results reality’ is setting back in. So whilst more evidence is needed, patience is running thin with each update.

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