Thursday preview: Tesco to reveal recovery in third quarter trading update
Tesco is expected to report a healthy third quarter trading update on Thursday as the supermarket begins to see improvements on the back of its turnaround plan.
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Citi expects Tesco to report UK like-for-like sales growth of 1.8% in the 13 weeks to 26 November, with a 0.3% increase in LFL sales over the Christmas period in the six weeks to 7 January.
"With LFL comparatives easing by around 110 basis points into the first quarter, this outturn should leave Tesco with more than enough operational momentum heading into fiscal years 2017 and 2018 to continue to execute its recovery,” Citi said.
Outside of the UK, Citi sees third quarter LFL sales growth of 1.5% and a Christmas LFL sales increase of 0.5% in Europe. In Asia, the bank expects a LFL sales rise of 0.5% in the third quarter and a 1% gain over Christmas.
“In totality, we expect the Christmas trading statement to be broadly supportive of consensus expectations for 2016/17 fiscal years, which close across the first quarter of calendar year 2017,” Citi said.
“Our key focus will be the level of LFL volume growth for Tesco across the reported 19 weeks, with its implications for the group’s momentum into 2017 and its continuing recovery.”
Ahead of the trading statement, Kantar Worldpanel data showed Tesco was a festive winner over the Christmas period. Britain's overall grocery market sales edged up 1.8% in the 12 weeks to 1 January, the fastest growth since June 2014. Tesco's total sales rose 1.3% in the 12-week period, driven by its performance in fresh food.
Under chief executive Dave Lewis, Tesco has been trying to overhaul the business following a decline in profits and sales. It comes amid a supermarket price war to regain market share from discounters Aldi and Lidl.
Tesco’s trading update follows well-received trading updates from supermarket peers J Sainsbury and Morrisons on Wednesday and Tuesday respectively.
Meanwhile, Marks & Spencer also reports its third quarter trading statement on Thursday amid concerns about the struggling general merchandise division, which sells clothing and homeware.
In the first half, the retailer reported a 19% decrease in pre-tax profit to £231m and announced a series of strategic initiatives including exiting loss-making international ops, a 10% reduction of clothing and homeware (C&H) space, organisational simplification, and a cessation of cash returns.
Numis said it believes the M&S C&H division performed so poorly in the third quarter of last year that it sees a good possibility that the business reports a small positive LFL outcome in this year’s third quarter.
“While the weak comparatives may see M&S report a more encouraging result through Q3, we retain our negative stance on the stock (currently trading on 11x calendar year 2017 price-earnings ratio), believing that the challenges in the C&H division will continue to prove challenging and costly to solve,” said Numis analyst Andrew Wade.
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