However, the City appears to be increasingly bullish about the grocer’s long-term growth, partly driven by its launch in the US in November.
In a research note, Citigroup forecast that Tesco will post like-for-like UK sales growth of 4.7 per cent (excluding petrol) for the first-half, but this will include slow 2.5 per cent comparable sales for the second-quarter.
Citigroup analysts said: “The impending first-half results (October 2) may include its weakest UK like-for-likes for many years, but sales growth has bottomed in the UK, its growth prospects and its valuation look compelling relative to its peers and there is a clear trigger on the horizon with the imminent US market entry and November investor trip.”
Ominously, Tesco investor relations manager Steve Webb said that the grocer still has significantly below market in large UK cities, including Newcastle, Leeds, Glasgow and Birmingham. Webb was speaking Piper Jaffray London Consumer Conference yesterday.
Citigroup is also bullish about Tesco’s progress on UK gross margins and believes an underlying improvement has been masked by dilution from strong fuel sales and higher rental from property deals. When the£25 million US start-up investment and costs from Tesco Direct’s operation are stripped out, Tesco UK would be left with about a 15 basis points improvement in trading margin.
In addition, many in the City believe that Tesco will benefit from Sainsbury’s having to focus more intensely on its bottom line if it is taken private by the Qatari investment fund Delta Two. Last week, Delta Two started addressing one of the potential major stumbling blocks to the deal by opening talks with the grocer’s pension trustees. Citigroup said there are plenty of examples, both in the UK and US, of food retailers that have been taken private experiencing a decline in growth and innovation, but few examples to the contrary.
In the US, Tesco has largely adopted radio silence over its plans. However, slowly but surely the scale of its offensive over the pond is becoming clearer. Webb said the grocer could open “hundreds” of stores from its distribution centre just outside of Los Angeles, California. Next week, Tesco is expected to provide more details about its plans for over the pond, as well as providing another barometer test of the health of the UK grocery sector.