UK retailing stocks hit by Tesco warning

The Age
Pan Pylas
January 13, 2012 – 6:24A

Britain’s retailing sector has taken a stock market beating after Tesco, the country’s biggest retailer by sales, issued a shock profit warning following one of its worst Christmas performances in years. Tesco’s woes, echoed in updates on Thursday from the likes of chocolatier Thorntons, 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 2700 stores.

The retailer said the 2.3 per cent decline in like-for-like sales, excluding the national sales tax and petrol sales, in the six weeks to January 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 there will be a knock-on impact on profits. Though it told investors 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 closed down 16 per cent to STG3.23 in London, wiping around STG4 billion ($A6 billion) 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 and William Morrison Supermarkets, two of Tesco’s biggest rivals, saw their share prices drop about six per cent even though they reported far more solid Christmas trading figures earlier this week.

Other stocks in the spotlight on Thursday included Thorntons, whose share price tanked 29 per cent after it reported a worse-than-expected 4.2 per cent decline in like-for-like sales in the 14 weeks to January 7 as it struggled with competition posed by supermarkets and price-conscious consumers. Home Retail Group, the owner of general retailer Argos, saw its share price drop five per cent after it warned it was set to slash its dividend following a poor festive season.

However, shares in Mothercare, which runs about 350 stores in Britain, rose 1.2 per cent even though it reported a three per cent drop in its domestic like-for-like sales. That was slightly better than anticipated.

Tesco’s performance over Christmas was worse than its peers, although many smaller, more specialised 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.