Tesco PLC warned of minimal profit growth in fiscal 2013 as sales in the U.K. continue to slump and the company is forced to invest hundreds of millions of pounds in trying to boost revenue.
Tesco reported a 2.3% decline in U.K. same-store sales in the six weeks to Jan. 7, excluding value-added tax and fuel, and a 0.9% yearly decline in third-quarter sales despite a major price-cutting campaign. Tesco shares were recently down 14.3%.
But while its U.K. difficulties hamper sales at home, the company's international operations continue to grow, and overall sales rose 5.2%, buoyed by rising petrol prices and strong growth in Asia.
Chief Executive Philip Clarke said he was disappointed with the U.K. sales, which were below the company's expectations, particularly because last year's sales were already crimped by heavy snow and transport disruptions. He said the company planned to invest hundreds of millions of pounds in improving the shopping experience, and will cut capital expenditure on opening large stores to focus on smaller formats and improving already-open stores.
The dire Christmas trading in the U.K. means Tesco's trading profit for fiscal 2012 will be at the low end of consensus although underlying profit before tax and earnings per share will be broadly in line with market expectations, the company said.
However, with substantial investment in the U.K. in fiscal 2013, the company now expects trading profit to show only minimal growth. Chief Finance Officer Laurie McIlwee said the market had been expecting trading profit growth of around 10% in fiscal 2013.
Tesco has already invested £500 million in its Big Price Drop campaign, a high-profile cost-cutting campaign that has denied the company any growth in U.K. trading profit for the second half of 2012.
But rivals' response to Tesco's cuts have been equally brutal and supermarkets are fighting hard to attract shoppers who are struggling with rising bills and stagnant wage growth.
J. Sainsbury PLC launched a branded price-matching campaign and a new "Live Well For Less" slogan which helped the U.K.'s third-largest supermarket chain to report Wednesday a 1.2% rise in third-quarter same-store sales, excluding VAT and fuel.
Meanwhile, Wm Morrison Supermarkets PLC replied with several cost-saving Christmas options and Monday posted a 0.7% sales rise over the festive season. Despite better performances, after the Tesco update on Thursday Sainsbury shares fell 5.7% and Morrisons shares were down 4.6%.
Mr. Clarke insisted the Big Price Drop campaign is necessary, and blamed the sales decline over Christmas on Tesco's decision not to bombard its customers with money-off coupons, a strategy which some rivals chose.
Alongside the price focus, Mr. Clarke said the company will invest heavily in improving in-store service and product ranges—in a tacit admission that the company has fallen behind its rivals in the grocery race.
He said the decision to slow down the opening of large superstores, which dedicate massive floor space to underperforming nonfood products, is due to a shift to investment in online sales, which can showcase Tesco's entire range of food and nonfood without the cost of large stores.
He said the number of store openings planned wouldn't change, implying Tesco remains focused on opening smaller format stores which play to consumers demand for smaller, more frequent, local shopping trips.
Tesco's efforts to lift sales in the U.K. have also been hampered by the company's large exposure to nonfood, which has been hit by the decline in spending seen across the retail market for the last year. Still, Mr. Clarke said that while nonfood same-store sales continue to decline, the rate had slowed and the trend was improving.
Tesco's U.K. operations accounted for around two thirds of the group's sales and profits last year and, while it has struggled at home, its international business continues to grow. And Mr. Clarke said the cut backs in capital expenditure planned for fiscal 2013 wouldn't affect its international expansion plans.
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