Company in the news: Tesco

Trading is getting worse at Tesco - and life could be tough for a good while yet, says Phil Oakley

Trading is getting worse at Tesco (LSE: TSCO). In Britain, like-for-sales fell by 1.5% during the third quarter, having been flat in the previous three months.

Tesco has lost the initiative in the UK grocery market to Sainsbury's and is no longer benefiting from a growing number of maturing stores. It seems that Tesco is suffering from an identity crisis customers don't really know what it stands for. It is losing out at the quality end of the market to Sainsbury's and Waitrose, and at the value end to Aldi and Lidl.

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Moreover, it is saddled with the problem of having lots of huge hypermarkets that are struggling to pay their way. Many of these will be locked into long-term rental agreements that will be expensive to get out of. Tesco still has around a 30% share of the British market, but I can'thelp wondering how much of this it will lose over the coming years.

Its large overseas exposure used to be one of the main reasons to buy Tesco. Not any more. Here too, trading is ugly. Not one country where it operates managed to grow in the last three months. Like-for-like sales fell by over 5% in Asia and by 4% in Europe. The shares do not look expensive on 11 times next year's earnings, but nor are they screamingly cheap. Analysts' forecasts are more likely to fall than rise, while a yield of 4.3% may not be enough to reward shareholders, as it is unlikely to grow. Sainsbury's still remains the best bet in this difficult sector. Life for Tesco could be tough for a good while yet.

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