Tesco shows grocers' shine while others struggle

12/01/2010 12:56:00

Forecast-beating sales from Tesco signalled a strong Christmas for Europe's supermarket groups, but weaker results from others suggested trading remains tough for more specialist retailers.

Germany's Metro, which runs electricals goods shops and department stores as well as supermarkets and cash-and-carries, posted a bigger than expected fall in fourth-quarter sales, while computer games group Game delivered a big drop in sales, hit in part by competition from grocers.

Bernstein analyst Chris Hogbin said there was little prospect of trade getting much better for specialist retailers, with taxes likely to rise and unemployment remain high in 2010.

"Consumer budgets are likely to be squeezed. That's much more likely to impact non-food rather than food," he said.

Despite signs of economic recovery across Europe, many retailers are struggling to emerge from a deep recession as shoppers worry about job prospects and look to pay off debt.

Euro zone retail sales fell a larger than expected 1.2 percent in November from October, including declines in Germany, France and Spain.

The picture seemed brighter in Britain, where a string of store groups have posted healthy Christmas sales as shoppers there take advantage of low mortgage rates to treat themselves.

Earlier, a survey showed retailers enjoyed the biggest rise in total sales in a December since 2005.

GROCERS GAIN

Tesco, the country's biggest retailer, added to the good news, reporting its best Christmas performance for three years.

Sales at stores open at least a year rose 4.9 percent, excluding gasoline and VAT sales tax, in the six weeks to January 9, far exceeding analysts' average forecast of 3 percent.

But Tesco's finance director, Laurie McIlwee, joined rivals in expressing concerns about the outlook for 2010.

"Unemployment is still high and of course we've still got all of the concerns about how a large government debt is going to be paid off," he told reporters on a conference call.

However, he said strong demand for discretionary non-food purchases like electricals and clothing -- which grew at twice the rate of food sales -- and a 16 percent jump in sales of the group's premium Finest range showed confidence was building.

"Just good news," said Nomura analyst Matt Truman. "We believe 2010 will be Tesco's year."

At 8:50 a.m. British time, Tesco's shares were up 2 percent at 426.55 pence, leading a 0.5 percent increase in the DJ Stoxx European retail sector index.

Tesco's performance added to signs that grocers at least enjoyed a strong Christmas as shoppers splashed out on expensive foods and benefited from savvy shoppers looking for cut-priced deals on non-food ranges.

Grocers' gains, however, have meant pain for some others.

Game Group reported a 13.8 percent drop in like-for-like sales for the five weeks to January 9 and lowered its full-year profit forecast, hitting its shares.

Department store group Debenhams also posted flat like-for-like sales for the 18 weeks to January 2, though against a good performance the year before.

Meanwhile fast-expanding Russian low-cost grocer Magnit said its sales rose by nearly a third in 2009 and unveiled plans to invest a further $1 billion (620 million pounds).

The Krasnodar, South Russia-based retailer opened 646 new stores in 2009 against 385 in 2008, bringing its total to 3,228 outlets, more than any other Russian retail chain.

CONFIDENCE TO INVEST

Metro, which has overtaken Tesco to become the world's third-biggest retailer due to the weaker pound, said fourth-quarter sales fell 3.4 percent to 19.4 billion euros (17.3 billion pounds), below analysts' average forecast of 19.6 billion.

Like-for-like sales fell 1.7 percent at its Media Markt and Saturn business, which is Europe's biggest electricals goods retailer, and were also down at its Kaufhof department stores and its cash-and-carry shops.

The group also sounded a cautious tone about future trading. In 2010 we expect the macroeconomic conditions to remain challenging," Chief Executive Eckhard Cordes said.

Eastern European sales were especially weak, down 12.5 percent, which Bernstein's Hogbin said was a worry.

"Until sales pick up, I don't think the stock will work," he said.

However, he was reassured that Metro said it was on track to meet analysts' profit expectations, which signalled its cost-cutting programme was bearing fruit, and that the group felt confident enough to increase its capital spending budget to 1.9 billion euros for this year from 1.6 billion in 2009.

At 8:50 a.m., Metro stock was up 1.2 percent at 41.77 euros.

Carrefour, Europe's biggest retailer and world No.2 behind U.S. group Wal-Mart, is due to report fourth-quarter sales on Thursday.