View from City Road: Tesco needs fuller trolleys

TESCO'S fall from grace has been sudden. The shares have underperformed the stock market by 20 per cent in the past month, as investors have opted to buy overseas earners. They have sunk from a post-election high of 296p to 224p, down 1p yesterday. The interim figures, although they revealed none of the horror stories that some in the City had feared, do little to rehabilitate the stricken supermarkets group.

You would not know it from a cursory glance. Total sales, boosted by new store openings, grew 9 per cent to pounds 3.65bn in the 24 weeks to 15 August. The operating margin widened from 6.4 per cent to 6.9 per cent. Pre-tax profits grew from pounds 230m to pounds 253m. Fully diluted earnings were up 10 per cent and the interim dividend was raised from 2p to 2 1/4 p.

The painful truth, however, is that same-store sales volumes were flat in the first half, despite the benefit of Sunday opening, and since then they have started to go backwards. That is a markedly worse sales performance than either of the other serious superstore rivals, J Sainsbury and Argyll.

Tesco's customers tend to be younger and less well-off, saddled with mortgages and more threatened by unemployment. They have been harder hit by the recession than their parents. More of them are visiting a Tesco (9 1/2 million of them a week), but their average trolley in the superstores is down 3 per cent to pounds 30.

Tesco, chaired by Sir Ian MacLaurin, continues to be a pioneer on the costs side. It is far ahead of its competitors in sales-based ordering - complex computer systems that automatically re-order products from information gleaned at the till. But there are huge teething problems, particular for fresh produce. The radical pruning of junior store managers (2,000 to 3,000 job losses in the period) may eventually prove the way ahead. Meanwhile it has had to contend with bruised morale in the stores and a pounds 5m redundancy bill.

Tesco should still make pre-tax profits of pounds 584m and earnings per share of 21.2p in the full year. It stands on a multiple of just 10.6 times prospective earnings. By contrast with J Sainsbury, which is on 15.8, Tesco looks very cheap. But until its customers fill their trolleys a bit higher, its embarrassing discount to the sector will not go away.

(Photograph omitted)