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Tesco slides despite strong food sales driving it to record Christmas

Like Sainsbury’s on Wednesday, Tesco has told investors it enjoyed a record festive season with UK sales rising 2% in the month leading up to Christmas day
tesco grocery aisle
Tesco’s delivery drivers made 770,000 drop-offs in the seven days before Christmas

Another day, another record Christmas for one of Britain’s ‘Big Four’ grocers.

After J Sainsbury plc (LON:SBRY) yesterday, this time it was the turn of Tesco PLC (LON:TSCO) which delivered record sales and volumes in the UK in the run-up to the festive season.

Sales up 2% in month before Christmas

In the four weeks leading up to Christmas day, the UK’s largest supermarket chain saw like-for-like sales rise 2.0% in the UK and Ireland compared to the same period in 2016.

That period also included Tesco’s “biggest ever sales week” in the UK with 58mln customer transactions and 770,000 deliveries in the seven days before Christmas.

Perhaps unsurprisingly given that grocery inflation hit 3.6% in December, food sales were the main growth driver – jumping 3.4% over the four-week period.

Passed on less food price inflation to customers

That may seem like volumes actually fell year-on-year, but Tesco said it worked hard with its suppliers which allowed it to pass on less inflation than its competitors.

Over the wider 19 week period to 6 January 2018 – which includes Tesco’s third quarter – UK sales rose 2.2%.

Group sales – which include the company’s operations abroad – could only muster growth of 0.6% over the 19 weeks though, with an 11.1% decline in its Asia business as it ceases “unprofitable bulk selling activities” in Thailand.

General merchandise sales continue to be a drag, comments which were echoed by Sainsbury's earlier in the week, while the demise of wholesaler Palmer & Harvey resulted in lost tobacco sales.

On track for full-year

“We have continued to outperform the market throughout this period, particularly in fresh food, thanks to our most competitive offer for many years,” said chief executive Dave Lewis.

“Our trading momentum accelerated across the third quarter and into December, with the four weeks leading up to Christmas Day delivering record sales and volumes in the UK.

Lewis added: “We are confident in the outlook for the full year and are firmly on track to deliver our medium-term ambitions.”

Booker acquisition to go through in March

Alongside Dave Lewis’ turnaround strategy, the big focus over the past year or so has been the proposed £3.7bn takeover of wholesaler Booker Group PLC (LON:BOK).

Regulators gave the deal final clearance in December and it will now be put to a shareholders who will vote on the issue.

Tesco said on Thursday it expects to hold that meeting at some point in late February with the transaction officially completing in early March assuming investors vote in favour.

Share slide expected after recent rally

“Lots to be positive about for Tesco as the Dave Lewis turnaround continues to yield results,” said ETX Capital analyst Neil Wilson.

“As with all the supermarkets, while top line growth is seen, we have scant detail on margins and inflation. Inflation is undoubtedly helping to push up sales figures, but it is less clear where margins are.

“The likelihood – as Tesco suggests in its update – is that it is better able to absorb inflation and pass less on to consumers than rivals, which ought to be positive for margins on a relative basis with competitors.

“As ever though the chances are that Tesco shares could slide after ramping ahead of the release in recent weeks – a trend we saw throughout 2017.”

Industry research group Kantar had also primed the market to expect growth of 3.1% earlier this week, setting the bar that bit higher for Tesco.

Shares are down 2.8% to 206p.

--Updates for Booker acquisition, broker comment and share price--

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