Tesco's UK sales fall as recovery plan struggles

LONDON (Reuters) - TESCO (TSCO.LO), the world's third-biggest retailer, reported a drop in underlying first-quarter British sales on Monday, as a recovery plan following its shock profit warning in January struggles to gain traction.

The supermarket group, which accounts for about one in every 10 pounds spent in British shops and makes over 70 percent of its trading profit there, said UK consumers were being careful with their spending as disposable income continued to fall and economic worries persist.

"Confidence isn't getting any worse but it isn't getting any better. The great hope would be that fuel prices are going to come down," Chief Executive Philip Clarke told reporters.

"A (car) tank of petrol is still 70 pounds ($110) now and it was 45 pounds two years ago, an amazing dent in household budgets."

Once one of the most consistent British companies in terms of earnings growth, Tesco stunned investors in January with its first profit warning in over 20 years, saying it needed to invest heavily to stem a steady decline in UK market share.

In April Clarke, a Tesco career lifer who as a youth stacked shelves in his local store, slashed expansion plans for the British chain and said he would spend over 1 billion pounds on improving stores and online shopping in a bid to reverse a decline in market share.

He said on Monday the momentum of change in the business was accelerating with extra staff put in 700 of its stores, over 145,000 staff given specialist training, more than 100 stores refreshed, own-label ranges updated and an Everyday Value range relaunched.

"Our customers are seeing the evidence of the changes we're making and they're telling us they like what they see."

But he declined to say how long it would take for a significant improvement in like-for-like sales to be seen.

Analysts acknowledged some improvement but expressed concern at revenue slippage at Tesco Bank, a moderation in like-for-like sales growth at the loss-making Fresh & Easy chain in the United States and a slowdown in China.

Tesco shares, which have lagged the STOXX Europe 600 retail index by 27 percent this year, were down 0.6 percent at 301 pence at 0600 GMT, underperforming a FTSE 100 index up 1 percent and valuing the group at 24.2 billion pounds.

"We are not yet seeing the concrete signs of improvement that would drive a re-rating of the shares said Espirito Santo Investment Bank analyst Richard Cathcart.

"As the year progresses management will have to show hard evidence that consumers' perceptions of the Tesco offer are improving."

BETTER PERFORMANCE

Tesco said sales at British stores open over a year, excluding fuel and VAT sales tax, fell 1.5 percent, in the 13 weeks to May 26, its fiscal first quarter, in line with analysts' expectations.

That was marginally better than a 1.6 percent decline in the fourth quarter of its previous financial year, despite a tough comparative period when sales were boosted by a royal wedding.

Clarke said Tesco's performance improved relative to the market, with total UK sales growth down 0.3 percentage points to 2.0 percent versus a decline in market growth of 1.3 percentage points, according to Kantar data.

He added the firm saw its biggest ever week for sales outside a Christmas period in the run-up to the four-day Queen's Diamond Jubilee holiday weekend at the beginning of June, with over 1 billion pounds in sales. That will be included in second-quarter results.

"Had it been in the (first) quarter it would have been substantially better for us in our reporting," said Clarke, noting the grocer sold nearly 1 million packs of party and picnic food and nearly 2 million sausage rolls.

But he said the UK supermarket sector remained very competitive through the first quarter, with a significant amount of couponing activity.

Sainsbury , Briton's No. 3 grocer, will report first quarter sales on Wednesday. Analysts forecast growth of 1.5-2.25 percent, though its period includes the run-up to the Jubilee.

Tesco, with over 6,000 stores in 14 countries, said total first quarter sales rose 2.2 percent including fuel.

The group won market share in 11 of its 12 international markets, with sales at constant exchange rates up 9.1 percent and 6.0 percent in Asia and Europe respectively.

"At this early stage of the year we are performing in line with market expectations for the group. The outlook for the year as a whole remains unchanged," it added.

(Editing by Rhys Jones, Greg Mahlich)