Tesco tears off to strong start as fresh food outperforms

Tesco romped off to a strong start to its new financial year, with Britain's biggest grocer delivering first quarter UK sales ahead of City expectations despite current tough conditions for the wider retail industry.

With a sixth consecutive quarter of positive sales growth, UK like-for-like food sales climbed 2.7% and UK total LFL sales up 2.3%, versus a consensus forecast of 1.9%, saw group LFL sales increase 1.0%.

Across the combined UK and Irish business, LFL sales grew 2.2%, though European sales declined for the second quarter in a row, down 0.4%.

While in Asia the supermarket group was pleased to resolve its Korean capital gains tax issue, with no further amounts payable, LFL sales across the region were down 6% after discontinuing all unprofitable bulk selling activity in Thailand, with a 0.6% impact on group LFL sales.

But the core UK business is going great guns, with the beginnings of a third year of positive food volume growth and strong volume growth in fresh food at 1.6% that represents a significant market outperformance.

Online grocery sales grew 4.8% and Tesco Bank also increased sales 4.8%, helped by a significant increase in secured lending following the launch into the intermediary mortgage broker market in April last year.

While no figure is provided for the level of food price inflation, it looks to have only played a small part in the grocery gains, with chief executive Dave Lewis making pains to stress: "In tough market conditions, we have stayed true to our commitment to helping customers - working closely with our supplier partners to keep prices low.

"Customers have responded by doing more of their shopping with us and as a result we continue to grow volumes, particularly in fresh food."

There was not much comment on outlook, with Lewis reiterating his confidence in creating "long-term, sustainable value for our key stakeholders and to deliver on the ambitions we have set out".

Tesco shares shot higher in early trading, jumping 1.5% to 182.8p in the first five minutes on Friday.

Following on from the somewhat gloomy trading statement from DFS Furniture the day before, which wiped a fair bit of equity value from the UK non-food retail sector, Shore Capital analyst Clive Black said Tesco has delivered a broadly encouraging update that may improve the mood a little.

He said the grocery giant's update underscored his more sanguine outlook on UK supermarkets compared to general retailers, many of which are facing wider market challenges including an ongoing material channel shift.

"Cutting to the chase from an earnings perspective, following this update from Tesco we would be surprised to see much change to consensus earnings expectations for FY2018," he said, noting that the group intends to restart paying its dividend stream in the current financial year.

Industry consultant John Ibbotson of Retail Vision said it was "a corker" of a result for Tesco's core UK market.

"Food, and fresh food in particular, is firing on all cylinders and that’s a huge shot across the bows for its competitors, in particular Morrisons.

"With inflation rising sharply, Tesco has used its immense buying power to keep prices lower for its customers. Against this inflationary backdrop, the numbers are all the more remarkable.

“But the toxic combination of rising inflation and low wage growth remains a major threat. As inflation continues to erode people's spending power, more and more of Tesco’s customers could be driven back to the discounters, Aldi and Lidl."

He said Lewis was sticking religiously to the basics of grocery, keeping keeping prices low and putting a focus on customer service.