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.