Tesco PLC’s Falling Sales Beat Expectations: What Next?

Today’s trading statement reveals that Tesco’s (LSE: TSCO) overall like-for-like sales dropped 1.3% in the first quarter compared to the equivalent period last year. However, this beat analysts’ expectations of a 2.5% fall, and beat the previous quarter’s drop of 1.7%

In the firm’s largest market, the UK, the drop in sales also came in at 1.3%. Meanwhile, international sales fell 1% overall.

These falls are an improvement

When sales are still falling it looks grim, but one glimmer of hope is that the rate of decline is slowing. In the UK, for example, declines in sales over the last four quarters look like this: (5.5)%, (5.1)%, (1.7)% and (1.3)%.

Tesco took the knife to its own prices during the period, so much price deflation is of the firm’s own making. Then there’s weakening commodity prices to drive down the value of the top line and, on top of that, a drag of around (0.5)% from annualising three national ‘£5 off £40’ campaigns that were not repeated, the company reckons. All of those conditions mean that falling revenue doesn’t necessarily mean a falling market share for Tesco.

In fact, UK like-for-like volumes are up 1.4%; transactions up 1.3%; and 180,000 more customers shopped at Tesco stores during the quarter, the firm claims. All of which gives hope to investors pinning their hopes on a Tesco turnaround.

What about growth?

Tesco today seems to be more about contract-and-survive rather than growth. During the first quarter, the contribution to total sales growth from net new stores reduced to 1.0% from 1.6% the previous quarter. The company is attacking the need for contraction on two fronts: there was a significant reduction in new store openings, and store closures announced in January and completed in April.

Dave Lewis, Tesco’s hatchet-wielding chief executive, reckons the improvements the firm is making are starting to have an effect.  The firm is fixing the fundamentals of shopping to win back customers and relying less on short-term couponing, he says. Such improvements run alongside the restructuring of the firm’s office and store management teams. However, Mr Lewis admits the market is still challenging and volatility is likely to remain a feature of short-term performance. Dragging a further positive from the results, he has it that these first-quarter figures represent another step in the right direction.

Yet more prices will be slashed!

Tesco followed the significant price cuts on branded products it made in January with similar reductions on more than 300 additional products during the first quarter. The firm looks like it’s trying to compete head on with discounting competitors such as Aldi, Lidl and others, even going as far as simplifying Tesco’s offer by reducing the range of products offered.

However, the firm insists it retains a market-leading level of choice for customers. When it comes to further price lowering, it seems to be a case of ‘watch this space’ — more price cuts are coming.

When I see the supermarket sector on an apparent race to the bottom with pricing, it makes me fearful for longer-term profit margins. Will Tesco ever restore profits to previous highs? I doubt it, because of the structural change affecting the industry. Working harder for less is the new ‘normal’, I reckon, which makes me unenthusiastic for any remaining turnaround potential at Tesco…

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.