Today I am outlining why I believe the latest trading statement from Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) is a positive indicator for its critical markets in the UK.
Transformation plan starts to produce the goods
Tesco’s latest trading statement revealed once again that sales expansion in the UK remains slow. The effect of rising competition continues to bedevil the grocery giant, but with total UK growth of 1.7% clocked up in the first half of the current fiscal year, signs are that Tesco’s long-running transformation package is beginning to gather momentum.
Tesco said that group revenues, at constant exchange rates, rose just 0.5% in 26 weeks to 24 August to £35.58bn. This meagre performance caused trading profit to slip 8.8% from the corresponding 2012 period to £1.59bn. The supermarket’s poor showing was caused by severe weakness across all of its overseas markets, particularly in Europe where profits dropped 70.8% to £55m.
Although the numbers made for grim reading at first glance, they still reflect the sterling work that Tesco is making in its ambitious “Building a Better Tesco” drive in its core markets in the UK, helped by a shake-up of its hugely underperforming non-food lines. Excluding petrol, total domestic sales rose 1.7% during June-August, speeding up from 1% during the previous three-month period. This helped to push trading profit from Britain 1.5% higher to £1.13bn.
There is no denying that the firm’s transformation scheme continues to be somewhat of an upward slog, with Tesco’s eye for juicy foreign markets — combined with taking for granted its position at the summit of the UK grocery market pile — having pounded its performance in recent years. As latest Kantar Worldpanel statistics show, the supermarket’s sales growth in the 12 weeks to mid-September registered at just 1.9%, well below average growth across the entire grocery market space of 4.2%.
Still, in my opinion the firm is making the right noises in terms of building a more sustainable earnings generator for the future. Tesco’s decision to end the so-called ‘space race’ of new giant supermarket openings and instead focus on boosting the number of convenience stores saw it open 54 new Express and 16 One Stop stores in March-August.
It also continues to make good progress in its online operations — market share improved during the period as sales rose 13%. A gaggle of other initiatives are also helping to drag shoppers back through its doors, from its Price Match scheme through to improving the quality and branding of its food products, a necessity after the recent horsemeat scandal. Although the road ahead remains difficult, I believe that Tesco boasts the know-how and the clout to drive earnings significantly higher once again.