September 28, 2012 / 3:23 PM / 5 years ago

Tesco improving, but outpaced by Sainsbury's

4 Min Read

LONDON (Reuters) - Tesco (TSCO.L), Britain's biggest retailer, is expected to show it is fighting back from a shock profit warning when it reports first-half results on Wednesday, though its sales growth is likely to be outpaced by rival J Sainsbury (SBRY.L).

Analysts expect both companies to say Britain's food retail market remains weak and that they do not see much improvement in the economy any time soon, with government austerity measures and inflation running ahead of wages growth continuing to squeeze household budgets.

Once one of the most consistent British companies in terms of earnings growth, Tesco stunned investors in January with its first profit warning in over 20 years.

In April Chief Executive Philip Clarke unveiled a plan to invest 1 billion pounds ($1.6 billion) in its main British business to stem a steady decline in market share to Wal-Mart Stores' (WMT.N) Asda, Sainsbury's and Morrisons (MRW.L), as well as discounters Aldi and Lidl.

Since then, Tesco has recruited 8,000 permanent staff to help give customers better service, devoted more store space to food, given its stores a warmer look and feel, revamped its food ranges and invested more in lower prices, promotions and marketing, making more use of customer information gleaned from its Clubcard loyalty scheme.

The firm has also stepped up investment in its internet and smartphone services, expanding its online range and rolling out its Click & Collect service of buying online for pick up in store.

Monthly industry data has shown signs Tesco's plan may be starting to work, albeit the firm has been promoting aggressively with money-off vouchers.

On Monday Tesco said its program was showing "the green roots of progress".

Flat Sales

"At some point commentary from management and the hard sales data will have to move in the right direction if investors are to have confidence that Tesco can recover," said Espirito Santo Investment Bank analyst Richard Cathcart.

Analysts' average forecast is for Tesco, which accounts for more than one in every 10 pounds spent in British shops and makes over 70 percent of trading profit in the UK, to report flat sales at UK stores open over a year, excluding fuel and VAT sales tax, in the 12 weeks to August 25, its fiscal second quarter.

That would be an improvement on like-for-like sales declines in the six previous quarters, including a first-quarter fall of 1.5 percent.

Analysts are also forecasting Tesco, the world's third- largest retailer behind France's Carrefour (CARR.PA) and U.S. leader Wal-Mart, to post a 10 percent fall in group trading profit to 1.6 billion pounds and a 13 percent decline in UK trading profit to 1.11 billion pounds.

Tesco's problems are not confined to Britain. Questions remain over its long-term commitment to loss-making U.S. chain Fresh & Easy, while in South Korea, its biggest overseas market, legislation allowing local governments to impose shorter trading hours is hurting. Growth has slowed in China and at Tesco Bank as well.

For Sainsbury's, Britain's No.3 grocer, analysts are forecasting a rise in sales at stores open over a year, excluding fuel, of 1.3-1.5 percent in the 16 weeks to September 29.

That compares with a rise of 1.4 percent in its first quarter.

Sainsbury has been outperforming rivals helped by strong growth online and in smaller convenience stores.

The company has also benefited from the success of its "Brand Match" pricing promotion, own-label food ranges, market share gains in general merchandise and a shrewd decision to sponsor the London Paralympic Games.

While Tesco's shares have fallen 8.5 percent over the last year, Sainsbury's have risen 25 percent, recently buoyed by the return of speculation regarding a possible renewed bid attempt from its 26 percent Qatari shareholder.

($1 = 0.6176 British pounds)

Reporting by James Davey; Editing by Mark Potter

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