Last updated: June 5, 2013 5:51 pm

Tesco recovery stalls as sales fall

©Bloomberg

Underlying UK sales at Tesco fell 1 per cent over the past three months, raising questions about whether its domestic recovery plan is veering off-track.

The performance is a reversal from the 0.5 per cent increase in UK like-for-like sales year on year, excluding petrol and value added tax, in the three months to the end of February.

The shares fell 5.17 per cent to 345.6p in London amid concerns about the momentum behind Tesco’s recovery, after Philip Clarke, chief executive, last year said he would invest £1bn to turn round the UK business after Tesco’s first profit warning in 20 years in January 2012.

However, Mr Clarke, who took over from Sir Terry Leahy two and a half years ago in Tesco’s biggest management transition for 14 years, insisted on Wednesday that the UK recovery was on track.

“What we are into is long-term sustainable growth. It’s going to ebb and flow over a quarter, but the direction of travel is the right direction,” he said.

Nevertheless, the first-quarter performance also compares with a period a year ago when UK like-for-like sales fell 1.5 per cent, which should have made year-on-year comparisons easier.

Clive Black, analyst at Shore Capital, said: “We harbour some growing concerns about the robustness of our UK forecasts given the weaker than anticipated trading momentum.”

Tesco, Britain’s biggest retailer, whose non-food business is under attack from online rivals such as Amazon, also added its voice to calls for a fairer tax system for British store groups, amid concerns that they are unfairly burdened. Tesco pays £1.5bn of tax a year

“We need a level playing field on tax,” said Mr Clarke.

“We will make progress whatever happens to the tax regime, but you can see how smaller shopkeepers burdened on rates and taxes are feeling the pressure,” he said.

Tesco rebuffed suggestions that its own aggressive expansion had also put pressure on smaller stores.

“That was then and this is now,” said one person close to the situation.

Mr Clarke said Tesco’s first-quarter performance was held back by a shake-up of its non-food business in the UK, where it was ditching some lines and moving more upmarket in others in an effort to win customers from rivals such as John Lewis. It was also hurt by the horsemeat scandal.

It is cutting back categories such as consumer electronics, small domestic appliances, DIY, car accessories and toys, which have thinner profit margins, to refocus on food and some related areas, such as clothing and health and beauty. Analysts estimated that this had resulted in a like-for-like sales fall of 8-9 per cent in these areas.

Mr Clarke said that work, which involved revamping hypermarkets to make them more attractive to customers, would weigh on sales for some time to come.

“It’s a big thing to do. There is no quick fix,” he said.

However, he said the group had made “Herculean” changes to its clothing business and these were already paying off. Tesco had also seen positive like-for-like sales in all food categories, with the exception of chilled convenience and frozen food after the horsemeat scandal.

Mr Clarke said the scandal “was well behind us now”.

Outside the UK, like-for-like sales in Asia fell 3.8 per cent, where Tesco has been hit by restrictions on opening hours in South Korea. Its performance also declined in China, where it is eyeing a joint venture, and Thailand. Like-for-like sales in central Europe fell 5.5 per cent.

Tesco said it remained in talks to sell its US business, Fresh & Easy.

Laurie McIlwee, finance director, said Tesco was in “advanced discussions with a number of businesses that are interested in buying Fresh & Easy’s business in its totality”.

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