Tesco set for strong Christmas after better-than-expected sales

In the third quarter to November 27, domestic like-for-likes improved to 1.5% including VAT and excluding petrol. Excluding petrol and VAT, the figure was 0.7%, ahead of most analysts’ expectations and up from 0.1% in the first quarter and 0.4% in the second.

UK like-for-likes including VAT and excluding petrol reached 3% towards the end of the quarter, compared with 1.5% for the period.

Tesco executive director Lucy Neville-Rolfe said: “We are seeing consumer sentiment improving, with more trading up to [premium brand] Finest, which is now showing double-digit growth, and discretionary spend coming back. It’s a slow and steady improvement and we expect it to continue.”

Neville-Rolfe said food inflation was 0.7% lower than the previous quarter. The British Retail Consortium also reported that food inflation fell to 4% in October from 4.4% in September.

Oriel Securities analyst Jonathan Pritchard said Tesco is “well placed to perform strongly over Christmas”. He said an ex-VAT like-for-like rate of 2% suggests some “small domestic market share gains” and the figure “represents outperformance of the industry average”.

Neville-Rolfe said non-food like-for-likes rose 3%, helped by Tesco’s Clubcard Exchange voucher promotion that ended on December 5, and Tesco Direct sales soared 30%.

She said: “We saw some customers bring forward the purchase of larger items like toys, with key buys including Harry Potter Lego and Buzz Lightyear.”

Tesco group sales climbed 8.8% in the period, when international operations notched up a sales increase of 15.7%.

In Asia, sales rose 23.4% and like-for-likes 4.3%. This was behind the 5% in the second quarter, which Tesco said was due to unseasonably warm weather. In China, it opened its fourth Lifespace mall with 96% occupancy. Tesco said China broke even in the period.

In Europe, sales jumped 7.6%, and like-for-likes rose 3.6%. Excluding petrol, all of Tesco’s European businesses achieved positive like-for-likes for the first time in three years.

In the US, sales rose 38.5%, mostly due to Thanksgiving. Like-for-likes advanced 9.8%.

Shore Capital analyst Clive Black said the bigger picture will come with the “important Christmas period that will contain any disruption to trade from the frozen conditions not just in the British Isles but also central Europe”.