Thursday preview: Tesco's travails in the UK to continue

There are not many things Britain's number one retailer Tesco does not sell, or so it seems, but tin hats are not among their product lines, which is unfortunate as shareholders may have need of some protection when the supermarket chain issues its Christmas trading update on Thursday.

By MoneyWeek

Published 11 January 2012 In Features

It is hard to find anyone who thinks that like-for-like (LFL) sales growth in the firm's UK stores will match that of Morrisons, let alone Sainsbury, both of which updated the market earlier this week. If that proves to be the case, the Tesco bulls will argue that the UK is becoming less and less important to Tesco, which has set its sights on becoming a major player in Asia and Central Europe, and a profitable niche player in the US.

Nomura Securities is forecasting flat UK LFL sales (excluding fuel) in the six weeks to January 7th, and once you strip out the effects of last year's increase in value added tax (VAT) that becomes a LFL sales decline of 1.0%. Given that in December 2010 the UK was covered deep in snow and that this seriously reduced footfall, a negative LFL sales comparison would represent a poor showing for the 800 pound gorilla of the UK retail sector; both Morrisons and Sainsbury reported LFL sales growth, excluding VAT and fuel, in their updates.

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"Despite an easier comp [comparative period] (being the net of snow and a VAT pull-forward), we expect Tesco's LFL performance to be little changed from Q3 [third quarter]. Within the mix, we think a promotional high street will have held Tesco's non-food performance to a small to mid-single digit LFL decline despite revamped ranging. In food, we expect the deflationary Price Drop to have sustained a volume out-performance versus its peers, although without the launch marketing benefit of Q3. We continue to expect the influence of Tesco's greater focus on shelf-edge pricing to grow in the coming quarters," the Japanese broker said.

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"In Asia, we expect a 6-week LFL of 1% and a continuation of Q3's trends (+0.8%) with a lesser flooding impact extended over the entire period. In Europe, we expect a slightly stronger performance (LFL +2% vs Q3 +0.9%) with easier comps in Central Europe. We expect space impacts to wrap around at c.8% and c.7% for Asia and Europe, respectively. With low touch remodels increasingly coming to the fore in the US, we look for a 6-week LFL of 13%," Nomura added.

Northland Capital Partners is moderately bullish on the stock. "As a true national house builder, the group's management has devoted its efforts to implementing a strategy of self-help in a flat market. New land and products are driving margin recovery in the stronger regional markets where there is a little help from underlying housing demand. The scale of the business means that turning the group's land bank into a higher margin pool of opportunity takes time, skill and money. That time has now arrived. Barratt's volume potential should accelerate its financial performance ahead of the median position of its peers with any housing market recovery. Its debt is now easier to carry following the debt restructuring programme," the broker said.

On the economic front, the Bank of England's Monetary Policy Committee is expected to stand pat with its interest rate and quantitative easing policies on Thursday. The situation is not quite so clear cut at the European Central Bank (ECB), where the trend has been to unwind earlier interest rate rises and where the picture is clouded by a new man at the helm, but the consensus is for the key lending rate to be held at 1% as the ECB waits to see the effects of the quarter point cuts in November and December.

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