Tesco the Christmas star as value offer outshines rivals

Group like-for-like sales swelled 0.5% in the third quarter ending 24 November and 1.5% in the six-week festive period to 5 January, giving 19-week growth of 0.8%.

The core Tesco UK business grew 1.2% over the 19 weeks, slowing to 0.7% in what was a tough third quarter for everyone and then jumping 2.2% in the Christmas period, when analysts had expected 0.7% and 1.4% growth respectively.

With its Booker wholesale arm up 9.6% over the 19 weeks and Republic of Ireland flat, total UK and Irish LFL sales expanded 2.1% for the 19-week period.

Online like-for-like sales increased by 2.6% over the Christmas period including nearly 51m items delivered and 776,000 orders over the main week as Delivery Saver subscribers jumped 3.8% year-on-year to 491,000.

The perfect Christmas picture was ruined by overseas operations, with Central Europe down 2.8% over the period and Asia falling 6.2% amid the restructuring in Thailand.

On an underlying basis, sales at Tesco Bank grew 2.4% in the 19 weeks as lending income increased, partially offset by reduced income from motor insurance.

Much of the growth in the third quarter was put down to the transition to new own-brands in the UK, with more than three quarters of the 10,000 Tesco-branded products relaunched by the end of Q3, with 82% of customers buying into the range.

In what was acknowledged across the industry as a more challenging UK market, chief executive Dave Lewis said the group made "significant improvements" in making its offer competitive and this is reflected in "a very strong Christmas performance which was ahead of the market". Tesco UK LFL sales growth of 2.2% was an outperformance of the market in both volume and value terms.

In Central Europe, Poland was the trouble spot as 14 unprofitable stores were closed and 32 more planned, with Christmas sales up 1.1% if it was excluded. Asia improved over the festive period after a very weak third quarter, with store operations in restructured to reduce costs and try and bring the business back to profits, while the Thai offer is "repositioned".

Lewis said the reshaping of the European business was continuing "and we are confident of the outcome we envisaged", while in Asia, "negotiations with suppliers are concluding satisfactorily and we can see this in our simpler, clearer, more impactful offer for customers".

He said the board was confident in the outlook for the full year and on delivering the targets outlined in two years ago.

"We have more to do everywhere but remain bang on track to deliver our plans for the year and as we enter our centenary we are in a strong position."

Industry consultant Steve Dresser said: "Tesco got a lot right at Christmas, clearly changing the value tier to the brands worked to bring customers in, who were then happy with what they saw. Value for money is something they're known for once again."

Contrasting with some rivals, he said the company's logistics "worked well" and "stock arrived on time and stores were able to operate better".

Tesco shares inched up 1% to 213.9p on Thursday morning.

Analysts at JPMorgan Cazenove said it was "worth noting that 3Q was partly impacted by the launch of Tesco new PL ranges (almost complete) with an improving exit rate within the quarter.

"International was relatively weak but within expectations and an improving exit rate too. Importantly, management highlighted negotiations with suppliers concluding satisfactorily in Asia (reason for 1H miss) and reiterated FY expectations. Altogether the update should keep the shares re-rating."

Barclays said the slowing in Booker’s LFL sales slowed from the "remarkable levels" seen in the first half was expected, "but remained impressive".

While sales in Asia slipped back the rebound over Christmas was to "the least negative level" since the end of the 2016/17 financial year.

"We expect Tesco’s trading statement will be received very warmly because it addresses two of the key questions that arose in late 2018 and caused significant share price weakness – namely concerns around the strength of UK trading and also the profit shortfall that appeared in Thailand," Barclays analysts said.

They added that for the UK: "Christmas is a very particular trading period and it can be dangerous to draw too many conclusions – but Tesco notes that its volumes were outperforming the market by the end of 3Q, helped by ‘Exclusively at Tesco’. Regarding the Thai situation, Tesco appears confident that it has made strong progress with its supplier discussions and it also highlights cost savings from changes made to its operating model."