BUSINESS

UK retailing stocks suffer as Tesco warns on profits following big Christmas disappointment

01/12/2012 11:42 EST | Updated 03/13/2012 05:12 EDT
LONDON - Britain's retailing sector took a stock market beating Thursday after Tesco, the country's biggest retailer by sales, issued a shock profit warning following one of its worst Christmas performances in years.

Tesco PLC's woes, echoed in updates Thursday from the likes of chocolatier Thorntons PLC, will likely add to fears over the state of the British economy — one in seven pounds spent by British shoppers is said to be spent at one of Tesco's 2,700 stores.

The retailer said the 2.3 per cent decline in like-for-like sales, excluding the national sales tax and gasoline sales, in the six weeks to Jan. 7 was below its expectations and "disappointing." The drop over the crucial Christmas trading period was largely driven by food sales and was far bigger than the 0.8 per cent drop consensus in the markets.

Tesco conceded that there will be a knock-on impact on profits.

Though it told investors that underlying pretax profit and earnings per share for 2011/12 will be broadly in line with market consensus forecasts, it warned that group trading profit growth will "be around the low end of the current consensus range."

It also said trading profit growth for the 2012/13 financial year will be "minimal" as it continues its drive to deliver what it calls "an even better shopping trip for customers, particularly in Britain."

The reaction to Tesco's update was savage — its shares were down around 15 per cent to 3.28 pounds by late afternoon London time, wiping around 4 billion pounds off its market value.

"This was a deeply underwhelming performance by Tesco in its home market — and all the more grave given the adverse weather conditions of December 2010," said John Ibbotson, managing director of the retail consultancy, Retail Vision.

Tesco's problems hit the sector hard. J Sainsbury PLC and William Morrison Supermarkets PLC, two of Tesco's biggest rivals saw their share prices drop 6 per cent even though they reported far more solid Christmas trading figures earlier this week.

Other stocks in the spotlight Thursday included Thorntons, whose share price tanked 26 per cent after it reported a worse-than-expected 4.2 per cent decline in like-for-like sales in the 14 weeks to Jan. 7 as it struggled with competition posed by supermarkets and price-conscious consumers.

Home Retail Group PLC, the owner of general retailer Argos, saw its share price drop 6 per cent after it warned it was set to slash its dividend after a poor festive season.

However, shares in Mothercare, which runs around 350 stores in Britain, rose 2 per cent even though it reported a 3 per cent drop in its domestic like-for-like sales. That was slightly better than anticipated.

Much of the downturn at Tesco can be explained by its decision in September to trigger a price war. The move to lower the price of 3,000 everyday products cost around 500 million pounds ($765 million). Tesco conceded that the number of customers drawn in by its latest promotion had not been enough to offset the lower prices.

Earlier this week, research figures revealed Tesco's market share for the 12 weeks ending on Christmas Day dropped from 30.5 per cent a year ago to 30.1 per cent.

"We deflated our prices," chief executive Philip Clarke told BBC Radio. "Our price inflation's half that of the market. But I've got to acknowledge we backed off some of our promotional and couponing activity too early."

Despite its problems in Britain, where the economy has flatlined for the best part of a year now, the company was pleased with its performance overseas, where it is one of the biggest retailers. Overseas sales were up 8.2 per cent during the period after strong performances in key regions such as Asia and Europe.

Tesco's performance over Christmas was worse than its peers though many smaller, more specialized retailers — such as CD and DVD retailer HMV — are clearly under strain, too. HMV issued three profits warnings last year and sold off its Waterstones book chain.

"Tesco's competitors had rather more success over the period, the outlook remains threatening and the company has been forced into something of a profits warning for the year," said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers.

Rival retailer J Sainsbury reported a 2.1 per cent increase in like-for-like sales, excluding fuel but including sales tax, in the 14 weeks to Jan. 7. Analysts estimated that sales would have been flat if the sales tax was taken out of the figures.

Marks & Spencer PLC said like-for-like sales in the 13 weeks to Dec. 31, excluding the sales tax, rose a modest 0.5 per cent as buoyant demand for its up-market food — always popular at Christmas — helped offset declines elsewhere, particularly of clothes and household items.

And Morrisons, which promotes itself as a value retailer, said its same-store sales grew 0.7 per cent excluding fuel over Christmas and noted that customers were substituting luxury items with cheaper alternatives — sparkling wine instead of champagne, for example.

Overall, the British Retail Consortium, retail's main lobby group, found that that like-for-like sales in December in Britain were 2.2 per cent higher than the same month in 2010, when heavy snow deterred many holiday shoppers.

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Danica Kirka and Meera Selva contributed to this story.