Saturday, December 4, 2010


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(Reuters) - Solid sales growth overseas is likely to help Tesco (TSCO.L) offset sluggish performance in its main British market when the world's third-biggest retailer publishes a third-quarter trading update on Tuesday.

Analysts think Tesco's sales growth from British stores open at least a year has lagged its rivals, partly because it sells more discretionary non-food goods, items where shoppers have cut back amid worries about rising taxes and unemployment.

Half-year results from electricals group Kesa (KESA.L) on Wednesday and music and books retailer HMV (HMV.L) on Thursday, as well as a trading update from computer games firm Game Group (GMG.L) on Wednesday, are likely to underscore tough conditions for UK non-food specialists, exacerbated by recent bad weather.

Some analysts are disappointed by Tesco's performance in Britain, particularly after several initiatives, such as the doubling of its Clubcard loyalty points last year.

"There is ... some concern about the apparent lack of traction which Tesco has gained in its attempts to re-energise the sales performance of the UK business," UBS analysts said.

The loyalty points themselves are a point of controversy, as Tesco counts sales made with vouchers as cash sales, which some analysts think flatter its figures compared with rivals such as J Sainsbury (SBRY.L) which exclude vouchers from sales.

However Tesco, which makes about two-thirds of sales and profits in Britain, has said the impact of vouchers on sales is small and its performance against peers is broadly comparable.

More bullish analysts argue Tesco is holding its ground at home -- with any slight sales underperformance offset by strong profit margins -- while expanding rapidly into fast-growing areas such as emerging markets and financial services.

That compares with international rivals like Wal-Mart (WMT.N), Carrefour (CARR.PA) and Metro (MEOG.DE) that are either grappling with tougher market conditions in their home countries and/or battling to turn round underperforming units.


Tesco, which runs more than 5,000 stores in 14 countries, said in October it was seeing a robust recovery in many overseas markets.

Last month -- at the same time as setting out bold expansion plans for China and South Korea -- it reported strong trading in most of its Asian markets.

Tesco shares have underperformed the STOXX 600 European retail index .SXRP by 7 percent this year, hit by worries that big investment overseas is damaging returns.

Goldman Sachs analysts believe returns should improve as its overseas assets mature, and the potential of its Asian and Tesco Bank businesses mean the shares should be doing better.

Analysts expect Tesco to report a 0.3 percent rise in sales at British stores open over a year, excluding fuel and adjusted for changes in VAT sales tax, according to a Reuters poll of 10.
That would be down from a 0.4 percent rise in the second quarter and below recent quarterly increases of 1.3-2.1 percent reported by rivals Asda, Sainsbury and Wm Morrison (MRW.L), albeit the trading periods are not exactly the same.

Tesco's overseas sales at constant currencies are tipped to rise by a low double-digit percentage, with like-for-like increases in Asia, continental Europe and the United States.

Kesa's results are likely to be overshadowed by speculation over the intentions of activist investor Knight Vinke.

Knight Vinke has built-up an 8.8 percent stake in the owner of Comet in Britain and Darty in France, driving its share price up over 30 percent in the last three months, and analysts believe some form of break-up approach is possible.

Analysts on average expect first-half pretax profit of 23 million euros (19.4 million pounds), up from 16 million a year ago, due to reduced losses from its Darty Box and developing markets.

HMV is tipped to post a wider first-half loss as it continues to suffer from a shift in demand for music and video to the internet, with analysts fearing a dividend cut.

Game Group is also expected to report a further decline in underlying sales as better games software and accessory sales only partially offset an ongoing decline in demand for hardware.

By Mark Potter and James Davey
LONDON | Fri Dec 3, 2010 6:59pm GMT
(Editing by David Hulmes)

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