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
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
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

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz