Tesco plunges on profit warning

Story highlights

  • Tesco shares plunge after retailer issues profit warning
  • The retailer says it is planning to open less hypermarkets
  • Tesco's shares slumped as much as 16% in morning trading in London
Tesco shares plunged on Thursday after the retailer issued a profit warning in the wake of disappointing Christmas trading in its UK heartland.
In a shift that could signal a turning point in the evolution of the UK retail sector, it also said it was planning to open fewer very big hypermarkets in the UK and prioritise online sales more.
Tesco's shares, which had been steadily falling ahead of the trading update, slumped as much as 16 per cent to 324¼p in morning trading in London, wiping as much as £4.9bn from its market capitalisation. Shares in other UK grocers fell too amid more general nervousness about the sector's prospects.
Philip Clarke, Tesco chief executive, said the company had been outgunned by rivals' promotions in the UK over the holiday period. "We chose in those critical six weeks not to hit customers with a blizzard of coupons but to invest mainly in cutting prices," he said.
While he argued this was the right focus in the long term, he conceded it had caused Tesco, the UK's leading retailer by sales, to underperform in the short term: "I have got to acknowledge that we backed off a bit on some of our promotional and couponing activity just as everybody else upped it."
J Sainsbury, one of Tesco's main rivals, had issued a more robust Christmas trading update on Wednesday, aided by a coupon-based promotion.
Tesco gave only a glimpse of its plan to open fewer very large stores in the UK than planned. Mr Clarke said its growth ambitions in non-food items could be increasingly satisfied through internet sales rather than building more "big box" stores.
Sales in the six weeks to January 7 were down 2.3 per cent year-on-year in the UK on a like-for-like basis that strips out new store openings, petrol sales and the VAT sales tax. This was weaker than the 0.9 per cent decline posted in the third quarter of its financial year, which ended in November.
Analysts had been expecting a decline of 0.9 per cent over the holiday period, according to a poll by Reuters. Mr Clarke said: "It is not what I wanted for Christmas."
The trading statement was a "major disappointment", according to analysts at Shore Capital.
Tesco said it now expected to deliver "minimal" growth in trading profit and underlying pre-tax profit in its next financial year, compared with the 10 per cent growth anticipated by the market.
The flat outlook reflected the need to invest hundreds of millions of pounds -- particularly in the UK -- in price cuts, product improvements and better service, it said.
Underlying pre-tax profit and earnings per share for the current financial year were likely to be broadly in line with market expectations, it added, although trading profit growth would be "around the low end of the current consensus range".
"In a challenging consumer environment at home, and with early signs of more cautious behaviour emerging elsewhere, we have seen more strain than anticipated on our profitability during the important seasonal trading period," it said.
Philip Dorgan, a Panmure Gordon analyst, cut his statutory pre-tax profit forecasts for the 2012-13 and 2013-14 financial years by 15 per cent, to £3.88bn and £4.43bn respectively.
He said the group's UK performance was especially disappointing because it was lapping relatively weak figures from a year earlier: "We know that improvement will take time to come through, but there doesn't appear to be any sign of any forward momentum."
If UK profits continued to fall, Tesco's ability to invest overseas would be hampered, jeopardising future growth even further, he added.
Overall, Tesco posted year-on-year worldwide sales growth of 5.2 per cent for the six-week period, aided by petrol sales and exchange rate fluctuations. Its businesses in Asia, continental Europe and the US posted 8.2 per cent growth.