Seymour Pierce has maintained its 'reduce' recommendation for supermarket titan Tesco in spite of headline sales figures coming in ahead of expectations on Thursday.

"A year on from an effective profit warning, Tesco has had an unspectacular Christmas in the UK given last year's very weak comparable and material margin investment," said analyst Kate Calvert.

Like-for-like UK sales excluding petrol and VAT rose 1.8% in the six weeks to January 5th, above the consensus estimated growth range of 0.5-1%.

However, Calvert said that while this is an improving trend from the third quarter - UK LFL excluding petrol and VAT were down 0.6% in the 13 weeks to November 24th - "it is a poor return when one takes into account that Tesco has invested 1% of its margin in FY13 to achieve this."

She also highlighted concerns over Tesco's trading internationally, with Europe showing a LFL sales decline (excluding petrol) down 3.6%. and Asian LFL sales down 0.2%, albeit an improvement on the third-quarter decline of 1.2%.

Calvert said: "Tesco's shares have already responded to a better sales trend in the UK. However, it is early days in the implementation of management's six-part plan to Build a Better Tesco in the UK. There is still much to be done given general merchandise remains a drag and we believe there will be no visibility on whether UK profits have bottomed until the second half of 2013.

"With inflation coming back and too many of its international businesses also facing trading issues currently, we reiterate our 'reduce' recommendation as we believe there is a high risk that things will get worse before they get better."

The broker has retained its 290p target price for the stock, saying that the shares - up 2.45% at 357.7p this morning - are "not cheap", trading at 10.9 times current-year earnings.

BC

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