Supermarket colossus Tesco saw a return to like-for-like (LFL) sales growth in the second quarter, although it has had to sacrifice margin to do so.

Reporting on trading in the 29 weeks ended August 25th, the group said statutory profit before tax fell 11.6% to £1,662m from £1,881m in the corresponding period of 2011. Adjusted profit before tax was down 8.5% at £1.759m. Broker Panmure Gordon had forecast adjusted profit before tax of £1.6bn.

Group sales, including value added tax (VAT), were up 1.4%, or 3.2% at constant exchange rates, to £36,010m from £35,530m the year before. With petrol sales stripped out, group sales were up 1.6%, or up 3.7% at constant exchange rates.

The UK like-for-like sales performance (excluding petrol and VAT) improved through the first half, delivering positive growth of 0.1% in the second quarter. Broker Jefferies Hoare Govett had forecast a 0.2% decline in LFL sales while Nomura had forecast flat LFL sales.

For the six-month period, LFL sales excluding petrol and VAT, were down 0.7% in the UK.

Top line growth of 5.4% was achieved in Asia, where sales clocked in at £5,906m. Europe's sales declined by 6.8% to £5,285m while the group's loss-making Fresh & Easy stores in the US saw sales climb 20.1% to £365m.

Speculation over the future of Tesco's US operations has been intense. The USA has been a graveyard for the ambitions of many a respected UK retailer, most notably Marks & Spencer, and is proving a tougher nut to crack than Tesco anticipated, although its timing could have been better, as it dipped its toe into the Arizona and California markets just as their housing markets collapsed and the credit crunch bit.

Tesco's "Fresh & Easy" US stores delivered a small reduction in losses at constant exchange rates in the first half, with sales performance improving throughout the period. Like-for-like sales growth was 5.2% for the half, following a stronger performance in the second quarter, when LFL sales growth improved to 6.9% from 3.6% in the first quarter.

The number of US stores delivering a positive cash contribution (before central overheads) continued to increase, from 30 at the start of the year to 55 by the end of the first half - nearly 30% of the portfolio. "We expect an increased number of stores to cross over into positive territory in the second half," the group disclosed.

Completing the sales picture, Tesco Bank's revenue eased 1.5% to £514m.

"Whilst our businesses in Asia and Europe have continued to do a great job for customers, our financial performance there reflects the tough economic backdrop and particularly the regulatory changes in South Korea. That we have gained or held market share in the majority of markets is a testimony to the skill of our teams across the group," claimed Philip Clarke, Tesco's Chief Executive Officer.

"In Korea, the new regulations restricting opening hours for large retailers are having an immediate, unhelpful effect on our performance and are expected to [have an] impact [on] our profit performance by around £100m for the year, weighted towards the second half," the company revealed.

It is the UK upon which the stock market remains fixated, however, with a number of brokers expressing concerns about the level of discounts Tesco has had to offer to prevent an erosion of market share. Trading profit margin in the first half declined to 5.15% in the UK from 6.01% in the first half of the previous year. Clarke revealed that, consistent with previous guidance, trading margins in the UK will be similar in the second half of the year to those seen in the first half.

For the group as a whole (worldwide), trading profit margin eased to 4.87% from 5.51% the year before.

As widely predicted, Tesco is cutting back on its investment in new space, suggesting that the battleground for supermarkets is now moving online. The group's capital expenditure for the year is now expected to be in the region of £3.2bn, having eased to £1.6bn in the first half in comparison with last year's half year splurge of £2.1bn. There were 60 new stores opened in the first half, with an emphasis on the Tesco Express format.

"We have made some important strategic changes which have fundamentally altered our approach to capital allocation. First, significantly reducing space growth in the UK and focusing on improving the performance of our existing stores - and second, investing in online to enable Tesco to take a leadership role in the digital revolution: playing our part in shaping the future of retailing," Clarke said.

Tesco's online grocery business saw sales up 11% year-on-year.

The interim dividend has been maintained at 4.63p.

Big Picture

Kantar Retail, a research and consultancy firm is sanguine about these figures. Bryan Roberts, Director of Retail Insights, comments: "Tesco's numbers today tell us that its under-performance in the UK may well have bottomed out. The last couple of years have shown us that even the giants can falter when they take their eye off the shopper; years of underinvestment in stores and people are now being reversed by Philip Clarke and these early signs suggest that his radical investment programme is paying off."

Despite stressing the need to communicate this to shoppers more effectively, in an increasingly competitive retail environment, Roberts adds: "In the fullness of time, Tesco's recent problems are likely to be seen as an unfortunate blip. Although structural problems remain, such as Tesco's reliance on tricky non-food categories in its Extra stores its leadership in on-line and convenience store retailing augur well for the future. Tesco's pioneering roll-out of Click & Collect grocery, for example, indicates that it is getting back on the front foot. Competitors should be fearing the worst as 2013 is likely to see a resurgent Tesco looking to make up the ground it has lost."

This must certainly be the belief of Warren Buffet who has a 5.08% holding in Tesco.



JH

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