Tesco's first quarter results: What the analysts say

With so much work in tow it leads us to be all the more concerned about Tesco’s current performance in its core market and – at the danger of being over-simplistic – it suggests to us that the sustained poor and under-performance is most clearly because its prices remain too high. Tesco’s customer insight must be drumming up some crazy stuff if it is leading management to adopt its present strategy, which to our minds is clearly not working – Darren Shirley, Shore Capital analyst

Tesco has failed to adapt to the change in competition from space race to distinct-offer competition. By raising prices faster than anyone else, we think Tesco has lost its differentiation, giving a free ride to the targeted retailers at both ends of the spectrum: value and quality. The ‘accelerated’ strategy is unconvincing: it is still trying to be everything to everybody and the only thing that has accelerated is market share losses. Internationally it remains overly centralised. Concerns about the quality of the earnings and accounting principles pose a risk of further write-downs or profit resets – Bruno Monteyne, Bernstein Research

We think Tesco remains a fixable business – an emphasis on pricing clarity, improved produce through local relationships and less focus on unpopular supplier funded products could drive greater relevance for the Tesco estate vs peers. However, with increased out of stocks in fresh, high prices and an unappealing supplier-led range, we think Tesco trading in the UK will remain subdued over the near-term and think UK margins could fall closer to zero in the medium-term. We argue a turnaround at Tesco could take another five years if near-term lateral thinking is not implemented – Rickin Thakrar, Espirito Santo Investment Bank

The key concern now is that if UK like-for-like sales growth rates continue at this level then management might need to consider cutting capital investment again as we calculate group-free cash flow is only 0.68x of the £1.195bn annual dividend. Tesco management should provide more evidence that the current strategy is working otherwise we could expect UK margins to fall below the current 4.5% in FY15. Investors should be questioning management’s strategy and why the prior year’s UK investment has led to falling sales – Mike Dennis, Cantor Fitzgerald

We expect little share price reaction to these numbers and no changes to consensus earnings forecasts. Management signalled in April that UK sales would be held back through most of this year by its UK price reductions and associated reduction in couponing activity, together with a greater number of disruptive store refreshes and hence we did not expect an improved like-for-like trend – James Collins, Deutsche Bank