October 3, 2009 / 12:13 AM / 10 years ago

Tesco second quarter to lag Sainsbury

LONDON (Reuters) - Tesco (TSCO.L), the country’s biggest retailer, is set to report slower underlying UK sales growth than rival J Sainsbury (SBRY.L) for the fifth quarter in a row next week, alongside a small rise in first-half profit.

A shopper carries his bags from the checkout as he leaves the Tesco store in Gorton, Manchester, northern England, January 13, 2009 file photo. REUTERS/Phil Noble

However, analysts expect Tesco to flag a stronger second-half profit performance, and some see signs it is beginning to close the gap on faster-growing competitors like Asda (WMT.N) and Morrison (MRW.L), as well as Sainsbury.

Barclays Capital analysts also note that Tesco shares have risen an average of 4.5 percent on the group’s last six results days as solid profit performances and continued growth in its international and services businesses have reassured investors.

Tesco’s underlying UK sales growth has lagged rivals in part because they have been reversing previous underperformance.

Tesco, which runs around 4,300 stores in 14 countries, is also more exposed to discretionary non-food items, which have suffered more than groceries in the recession.

Some of the underperformance has been self-inflicted as well. Tesco launched a cheaper range of discount brands in September last year, which helped to stem the flow of customers to hard-discounters like Aldi and Lidl in the recession, but also depressed the amount of money it takes at the till.

As the launch of the discount brands passes its anniversary, analysts expect Tesco’s relative performance to improve. The group has also invested heavily in its popular Clubcard loyalty programme, which some think will boost sales.

Market researchers Nielsen said earlier this month that Tesco’s sales had outperformed Sainsbury in the four weeks to September 5 for the first time in a year.

FALLING INFLATION, TOUGHER COMPS

Analysts expect Tesco to report a 3.4 percent rise in sales at British stores open at least a year, excluding fuel and VAT sales tax, for its second-quarter ending August 29, according to the average forecast of 12 polled by Reuters.

That would be down from 4.3 percent in the first quarter, due in part to a tougher comparative number last year and to falling food price inflation.

Sainsbury, Britain’s third-biggest grocer, is expected to report a 5.6 percent rise in sales on the same basis for the 16 weeks to October 3, down from 7.8 percent in the first quarter for the same reasons.

Tesco’s total sales for the six months to August 29 are tipped to climb 10 percent to 28.1 billion pounds, with the benefits of an acquisition in South Korea last year offsetting weakness in some European markets, particularly Ireland, Hungary, the Czech Republic and Turkey.

Profit before tax and one-off items is forecast to rise 2 percent to 1.48 billion pounds, held back by interest payments due to the South Korea acquisition and a deal last year to buy Royal Bank of Scotland (RBS.L) out of a financial joint venture.

Excluding these, trading profit is expected to climb 13 percent to 1.55 billion pounds, with a full contribution from the financial services business helping to mitigate continued losses in the United States.

Britain’s grocers have coped better than sellers of more discretionary items in the recession. But there have been signs of an improvement in recent weeks from the likes of home improvements group Kingfisher (KGF.L) and clothing retailer Marks & Spencer (MKS.L).

Telecoms and retail group Carphone Warehouse CPW.L is likely to confirm this trend in a trading update on Thursday, when it will also update investors on its plans to split into two separate businesses.

Bicycles and car parts retailer Halfords (HFD.L) will issue a trading update on the same day.

Editing by Rupert Winchester

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