Tuesday, June 10, 2008

Tesco PLC News: Tesco Shares Down Slightly On Q1 Trading Update; Lower Than Expected But Still Healthy First Quarter Growth

LONDON -(Dow Jones)- Shares in retail giant Tesco PLC (TSCO.LN) dropped 2% Tuesday after it reported a slowdown in U.K. sales growth for the first quarter and warned that U.K. consumers were becoming more cautious.

Tesco, Europe's third-largest retailer by sales, said in a trading update that total sales in the 13 weeks to May 24 rose 13.7%, although this was largely driven by growth outside of the U.K.

"Our international operations, helped in part by favorable exchange rate movements, have delivered an excellent start to the year... and the core U.K. business has once again delivered good growth in a market characterized by recovering competitors," the company said in a statement.

The group described its U.K. performance as "solid" with total sales up 9.4% in the period. Excluding sales of petrol and new store openings, however, sales were up just 3.5% - marking a slowdown since the start of the period.

The company said in April that same-store U.K. sales were up over 4% in the first five weeks of year. It is targeting a full-year underlying sales growth figure of between 3% and 4%."

Although food category performance has been good, our rate of growth in non- food has eased as consumers have become more cautious with their spending during recent months," the company said.

The market focused its attention on the downbeat U.K. comments and by 0724 GMT, Tesco shares were down 9 pence, or 2.2%, at 393 pence in a lower London market. Other retailers also lost ground.

Shore Capital analyst Clive Black said the more cautious comments on the U.K. may resonate around the market.

Finance Director Andrew Higginson said on a conference call with reporters that non-food sales in the U.K. were growing at a slower rate than food sales "for first time in a long while." Sales of "big ticket" items such as furniture were "slower than we might have liked," he said, "but overall we're pretty pleased."

Higginson added that Tesco's apparent underperformance compared with some U.K. competitors was not a cause for concern. "I wouldn't worry too much about that," he said.

"Asda and the discounters are having a moment in the sun at the moment," he added, " but we're taking share from most parts of the market."

Tesco accounts for nearly one-third of the U.K. grocery market, nearly double that of its two biggest rivals, Asda Group Ltd., a unit of Wal-Mart Stores Inc. (WMT), and J Sainsbury PLC (SBR.LN).

Higginson said that the 3.5% U.K. growth was partly driven by food cost inflation as well as volumes. He declined to provide figures but added that Tesco's inflation was "a good bit below" the sales growth figure.

The group operates around 3,320 stores, of which 1,990 are in the U.K. The remainder are in Ireland, the Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Japan, Malaysia, South Korea, Thailand and the U.S. (Fresh & Easy Neighborhood Market).

International sales rose 27% during the first quarter benefitting from favorable currency movements. Stripping out this benefit, sales were 13.9% higher.

Higginson pointed out that this growth did not include any acceleration in space expansion - which will be weighted toward the second half of the year. The company is adding 9.8 million square feet of new selling space in its international division this year.

Just two new hypermarkets opened in Europe during the first quarter, out of a total of over 50 planned for the year as a whole.

Press reports recently have suggested Tesco is about to buy out Royal Bank Of Scotland Group PLC's (RBS) 50% stake in Tesco Personal Finance for GBP1 billion. Higginson declined to comment on the speculation.

Additional Reporting:

>Motely Fool Financial UK: "Tesco Powers Ahead"

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