Shares in Tesco dive as profit alert stuns the City

Supermarket giant says Christmas was disappointing and warns that growth in year ahead will be minimal

Nearly 16 per cent was wiped off the market capitalisation of Tesco yesterday after it stunned the City with an almost unprecedented profit warning and its worst UK sales for two decades.

Analysts took an axe to forecasts and warned of an "inflection point" for the grocery industry, as Tesco said its operating profits would be at the bottom end of City forecasts this financial year, with "minimal" growth next year.

On a momentous day, the world's third-largest retailer described its UK performance over Christmas as "disappointing" and admitted it had made mistakes communicating its £500m Big Price Drop campaign and by not issuing enough coupons during the festive period. The grocer also unveiled historic changes in its strategy to focus on opening smaller stores, as opposed to its big monolithic hypermarkets.

Shares in Tesco plummeted by 61.6p, or 16 per cent, to 323.5p yesterday.Morrisons and Sainsbury's, whose shares fell by 5.4 per cent and 6 per cent respectively, were also badly buffeted, as investors fretted over growth prospects and lower margins for the sector.

Philip Clarke, the chief executive of Tesco, admitted it was the worst UK underlying sales at the grocer for "two decades". While Tesco has 13 operations in countries overseas, including Poland, China and South Korea, the UK still represents more than two-thirds of group operating profit.

The grocer's underlying UK sales, excluding fuel and VAT, tumbled by 2.3 per cent over the six weeks to 7 January, which was worse than City forecasts. This compares with 1.2 per cent growth at rival Sainsbury's and the Bradford-based grocer Morrisons'0.7 per cent rise in sales.

But it was Tesco's comments on "minimal" growth in trading profits in 2012-13 that City analysts seized upon. Dave McCarthy, the analyst at Evolution Securities, said the group's trading profit is set to be downgraded by between 8 per cent and 10 per cent – with much of it in the UK.

He described the rebasing of the grocer's domestic profit margin as a "major event and represents a structural change in Tesco". The grocer is also cutting back on its capital expenditure in the UK and reducing its opening programme.

Mr McCarthy said: "Tesco is cutting back on the amount of new space devoted to non-food and will no longer be opening large, 100,000-square-foot stores." The grocer will now focus on convenience stores and supermarkets, sized between 40,000 sq ft and 60,000 sq ft. In an effort to improve its shops, Tesco has already rolled out a trial in 15 UK stores to about 200 six weeks ago. "It is on price, quality, range and service – a broad-based series of plans to see the customer experience gets better," said Mr Clarke.

Tesco's total UK sales, excluding fuel, rose by 1.7 per cent. Revenues rose by 4 per cent at the group level, driven by strong sales in Asia and the US. Mr Clarke said: "The story that everyone wants is disaster everywhere but Asia and America were not." The grocer is forecast to grow pre-tax profits to £3.6bn this financial year, according to Deutsche Bank.

Parade of shops: Thursday's round-up

Home Retail

Sales tumbled again at the struggling catalogue specialist Argos, down 8.8 per cent over the 18 weeks to 31 December. But revenues fell by a more modest 2.6 per cent at its DIY chain Homebase. With full-year profits more than halving, Home Retail said yesterday it expects a "significant cut" in its dividend and is closing its four HomeStore&More shops at a cost of £10m.

House of Fraser

The department store chain enjoyed barnstorming Christmas sales. House of Fraser posted a 11.1 per cent rise in like-for-like revenues over the 5 weeks to 31 December, but it grew by only 3.6 per cent over the longer nine-week period. But its chairman Don McCarthy said the warm autumn weather and heavy high street discounting had put "greater pressure on margins".

Thorntons

The troubled chocolatier warned on profits before Christmas and yesterday said it expects "weak consumer sentiment throughout 2012". Thorntons also suffered a 4.2 per cent fall in underlying sales in its stores over the 14 weeks to 7 January. But its commercial sales to other retailers jumped by 16.9 per cent, which helped its total sales rise by 0.6 per cent to £83.7m.

Mothercare

The ailing maternity retailer talked up an improved UK performance. While Mothercare's domestic like-for-like sales still fell by 3 per cent over the 13 weeks to 7 January, this was better than a 5.4 per cent fall for the year to date. Total sales rose by 1.2 per cent, driven by international sales.

JD Sports Fashion

The sportswear retailer posted a slight rise in underlying sales in the UK, continuing its performance of growing like-for-like sales for seven years consecutively. Sales edged up by 0.1 per cent over the 5 weeks to 7 January.

Halfords

The bike and car accessories chain saw underlying sales fall 4.8 per cent in the 13 weeks to 30 December. Halfords' car maintenance division's suffered a 12.8 per cent fall in sales after it came up against strong comparable sales in 2010, when the heavy snow drove a surge in revenues.

Ocado

The online grocer issued a profits warning in December, as it battled capacity constraints at its warehouse in Hertfordshire. Its sales rose by 16 per cent to £59m over the four weeks to 25 December.

PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
people
Life and Style
techApp to start sending headlines, TV clips and ads to your phone
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Planning Manager (Training, Learning and Development) - London

£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

Asset Finance Solicitor

Highly Competitive Salary: Austen Lloyd: CITY - ASSET FINANCE - An outstanding...

HR Analyst - Banking - Bristol - £350-£400

£350 - £400 per day: Orgtel: HR Analyst - Banking - Bristol - £350 - £400 per ...

Techincal Accountant-Insurance-Bank-£550/day

£475 - £550 per day + competitive: Orgtel: Senior Technical Accountant-Insuran...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment