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Tesco - Christmas sales creep up in UK

Nicholas Hyett | 9 January 2020 | A A A
Tesco - Christmas sales creep up in UK

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Tesco's total like-for-like (LFL) sales were 0.9% lower than last year in the 19 weeks to 4 January 2020. That reflects the restructuring of the group's Central European business, with the UK & Ireland reporting LFL sales growth of 0.4%.

The shares rose 1.5% in early trading.

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Our view

The delicate balancing act between volumes and margins make things a bit of a slog for Tesco, but so far the group has navigated the headwinds well.

Margins have hit targets and the brand has been refreshed. Savvy deals with Booker and Carrefour have created significant cost saving opportunities and, in a ferociously competitive marketplace, that's helped operating profit grow. With much of the heavy lifting complete it is perhaps a natural time for Dave Lewis to hand the reins to someone else.

But incoming CEO, Ken Murphy, still has work to do. Aldi and Lidl remain a threat and it's increasingly apparent that Walmart is looking to offload Asda. A sale could breathe new life into the brand - potentially sparking another price war and undoing some of the good work on margins.

Other initiatives haven't been quite as successful. We're yet to get a meaningful update from Jack's - Tesco's discount store chain. Fortunately store numbers are limited at the moment, so if the project runs aground the cost will be minimal. Tesco Bank has had a shakeup, and the Asian business is under review too. The move out of mortgages significantly reduces the bank's scale, and together with the possible sale of the Thai and Malay businesses significantly boosts the group's cash position.

There is a question about what the extra cash will be used for, especially as the company's balance sheet has continued to improve. Debt's fallen and leverage is at more comfortable levels, while Tesco now owns the majority of its stores so there are fewer onerous leases to deal with.

All things considered Murphy will be taking on a far healthier beast than Lewis inherited. A dominant market position and healthy margins should equip it well to face growing competition. The challenge will be finding a way to deliver growth in the years ahead.

The shares offer a prospective yield of 3.6% and trade on a price to earnings ratio of 13.9 - slightly below the longer term average of 14.2.

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Q3 and Christmas Trading Update

LFL growth in the UK & Ireland was driven by Booker, where sales rose 4.1% in the 19 weeks following a strong third quarter. The Republic of Ireland showed LFL growth of 2% for the 19 weeks. The UK actually saw LFL sales fall 0.2% in the full 19 week period, although Christmas sales rose 0.1%, the fifth consecutive year of Christmas growth.

UK Christmas sales benefitted from lower prices across key festive products, while plant based foods also proved more popular during the period. Lower sales in the UK reflect reduced sales of general merchandise.

A 10.3% decline in Central European LFL sales reflects fundamental changes to the Polish business as well as changes in the Czech Republic, Hungary and Slovakia.

Asia saw LFL sales fall 1.6%, as the group reduced its focus on general merchandise. Fresh food sales in the region were strong (up 5%), aided by the launch of new convenience formats. The group is considering the sale of its Thailand and Malaysian business following approaches from interested parties.

Total Tesco Bank revenues fell 9.6%, reflecting the decision to exit the mortgage market. Underlying revenues rose 0.5% over the 19 weeks.

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Hargreaves Lansdown's Non-Executive Chair is also a Non-Executive Director of Tesco.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.