Tesco upbeat despite new sales dip

Tesco struggled to convince the market it is back on track today despite reporting a record £1 billion of Jubilee week sales.

The UK's biggest retailer suffered a 1.5% fall in underlying sales in the 13 weeks to May 26, although this did not include the period around the Queen's Diamond Jubilee when it enjoyed its biggest ever week outside Christmas.

Despite its latest quarterly sales decline, Tesco said its £1 billion turnaround, which has seen it revamp 100 stores and recruit 4,300 extra staff, is beginning to gain traction as it competes more convincingly with rivals.

Although investors were spared another profits warning, shares dropped amid fears it is giving out more money-off vouchers to bolster its performance.

Chief executive Philip Clarke said: "Our customers are seeing the evidence of the changes we're making and they're telling us they like what they see."

Tesco kept its profits outlook for the year ahead unchanged, reassuring investors after the chain's first profits warning in 20 years in January.

Clive Black, an analyst at Shore Capital, said: "We see Tesco UK as toughing it out a little more effectively than it was."

But he added that it will take at least two years for the turnaround to be completed.

The retailer is struggling in a competitive market, as it battles it out with buoyant rivals Sainsbury's, Asda and discounters Aldi and Lidl at a time when shoppers are cutting back.

However, Freddie George, an analyst at Seymour Pierce, said: "We continue to believe that Tesco is still a strong business with an unassailable market leading position in the UK, that has temporarily come off the rails."

As some in the City worry that Tesco's dominance over the last decade is under threat, it has faced pressure to make radical changes such as exiting its banking or loss-making US divisions.

However, Mr Clarke's turnaround plan has focused on sharpening up its pricing and customer service and refreshing its jaded and tired stores.

It has already given 145,000 staff specialist training, improved the offers through its Clubcard scheme and relaunched its Value range as Everyday Value with more colourful packaging.

Mr Clarke added: "We are rapidly implementing our six-point UK plan and I'm particularly proud of the relaunch of our Everyday Value range and the fact we have now put extra staff into 700 of our stores - in 500 of them within the last three weeks alone."

He said the group's sales overseas proved resilient, despite battling slowing economic growth in China and the eurozone debt crisis.

Across its international divisions, which make up about a third of its profits, underlying sales rose 0.5%, helped by strong growth in Thailand as it recovered from heavy flooding the previous year.

However, underlying sales growth in China deteriorated amid the country's economy slowed.

And there was more worrying news from the US where its Fresh & Easy business saw sales growth slow.

Mr Black said the figures were "a body blow" for the division, and warned the clamour to exit the US will grow if losses worsen.

PA