(Refiled to correct punctuation in third paragraph)
* Q1 UK underlying sales down 1 pct; forecast down 0.5-1 pct
* Underlying sales also fell in Asia, continental Europe
* CEO says UK recovery plan "on track"
* Shares fall up to 4.9 pct
By James Davey
LONDON, June 5 Tesco, the world's No.3
retailer, has posted a drop in quarterly underlying sales in its
main British market, resuming a trend seen for most of the past
three years and raising doubts about its 1 billion-pound ($1.5
billion) turnaround plan.
Shares in the supermarket group fell up to 4.9 percent on
Wednesday after it said it had suffered from weak demand for
general merchandise, as cash-strapped Britons cut back on
discretionary purchases in a flagging economy, as well as the
fall-out from Europe's horsemeat food contamination scandal.
Some analysts, such as Investec Securities' Dave McCarthy,
have questioned whether Tesco can maintain its UK operating
profit margin of 5.2 percent, even though the company said in
April it believed that rate was sustainable.
Tesco, which makes about two thirds of its revenues in
Britain, has struggled more than many rivals in part because it
sells a higher proportion of non-food goods than other grocers
and also because of years of underinvestment that saw it lose
ground to rivals like J Sainsbury and Asda.
Philip Clarke, chief executive since 2011, has tried to
rectify that by investing 1 billion pounds on more staff, new
food ranges, revamped stores and lower prices.
However, sales at Tesco's UK stores open over a year,
excluding fuel and VAT sales tax, fell 1 percent in the 13 weeks
to May 25, at the bottom end of analysts forecasts for a fall of
between 0.5 and 1 percent and reversing a rise of 0.5 percent in
the previous quarter, which was the strongest quarterly result
in three years.
"These results go to show that even with 1 billion pounds to
throw at it, there are no guarantees," said John Ibbotson,
director of retail consultants Retail Vision.
EBB AND FLOW
Despite the fall in underlying UK sales, Clarke told
reporters his recovery plan was on track.
"What we're into is long term sustainable growth. It's going
to ebb and flow over a quarter but the direction of travel is
the right direction," said Clarke, a Tesco lifer who began his
career with the grocer aged 14, stacking shelves in a store
managed by his father.
Clarke said he was not expecting UK economic conditions to
improve in the near term, despite an industry survey on Tuesday
showing retail sales rebounded in May.
He forecast non-food like-for-like sales would remain down
in the current financial year, but stressed it was a "top line"
(sales) rather than a "bottom line" (profit) drag.
Tesco was reducing its exposure to weaker categories like
consumer electronics, and increasing its focus on higher growth,
higher margin categories like clothing, he said.
Analysts estimate Tesco's underlying non-food sales in the
UK fell by a high single-digit percentage in the first quarter,
while food sales were hit by the discovery across Europe of
horsemeat in products labelled as beef. Tesco was one of several
firms forced to withdraw some goods and apologise to customers.
Last month Britain's fourth-biggest grocer, Wm Morrison
, posted a 1.8 percent fall in first-quarter underlying
sales, while Asda, the second-biggest, reported a 1.3 percent
rise, albeit for different trading periods. Third-ranked J
Sainsbury is due to give a trading update on June 12.
Tesco's problems are not confined to Britain. Though total
international sales rose 5.5 percent, the outcome was helped by
favourable currency movements.
Like-for-like sales, excluding fuel, fell 3.8 percent in
Asia, hit by restrictions on trading hours in South Korea,
Tesco's largest overseas market, and weaker demand in China.
They also fell 5.5 percent in its continental European
markets, hit by recession and stiff competition.
Tesco, which trails France's Carrefour and
Wal-Mart, the world's biggest retailer by annual sales, makes
about 12.5 percent of its group revenues in continental Europe.
In April the firm confirmed it would withdraw from the United
Tesco's shares, up 20 percent over the past year, were down
16.6 pence at 347.8 pence at 1252 GMT, having earlier touched a
four-month low of 346.7 pence.
But Panmure Gordon analyst Philip Dorgan said he believed
Tesco's management is beginning to get a grip on the steering
wheel and now has a clearer view of how its stores and online
offer will develop.
"Remember that the darkest hour is just before dawn," he
($1=0.6539 British pounds)
(Editing by Mark Potter and Greg Mahlich)