1Q19 Trading Update

British retailer Tesco reported a marked improvement in group comparable sales in 1Q19, supported by very strong comp growth at its acquired Booker wholesale division. For the 13 weeks ended May 26, Tesco reported the following:

• Comps in Tesco’s core UK segment were up 2.1%, slightly below the 2.3% recorded in each of the prior two quarters. Combined UK and Ireland comp growth of 3.5% in 1Q19 came in ahead of consensus of 2.0%.
• Comp growth at Booker came in at 14.3%. Excluding tobacco, comp growth was 12.4%. Booker was consolidated from March 5.
• Booker’s contribution drove group comparable sales growth of 1.8% in 1Q19, a meaningful sequential uplift from 0.4% growth in the prior quarter.
• 1Q19 comparable sales growth was 3.0% in Ireland, (1.0)% in Central Europe and (9.0)% in Asia.

Tesco reported total group sales growth of 2.3% in 1Q19, up from 1.5% in the prior quarter. Total UK sales growth of 1.9% in 1Q19 was a slowdown from 2.3% growth in the prior quarter. Management noted that 1Q19 was the 10th consecutive quarter of positive group comp growth. Management commented that, in its core UK market, Tesco is more than a quarter of the way through a relaunch of over 10,000 private-label products. The company invested in price cuts across its value-positioned fresh food brands at the end of the quarter. Tesco Direct, the retailer’s general merchandise e-commerce offering, will cease trading on July 9. Tesco UK’s clothing sales were up 1.7% year over year, on a comparable basis. However, general merchandise was a drag on UK sales growth.

Outlook

Management issued no new guidance. At its fiscal 2018 results in April, Tesco said that it remains on track to deliver the goals set out in October 2016: to reduce costs by £1.5 billion, to generate £9 billion of retail cash from operations and to improve operating margins to between 3.5% and 4.0% by FY20. Tesco completed its merger with wholesale group Booker on March 5, 2018 and anticipates a synergy benefit of about £60 million in the first year post-completion of the merger. For FY19, analysts expect Tesco to grow revenues by 10.9% to £63.79 billion, on the back of the Booker acquisition. Consensus calls for EBIT to grow by 27.1% to £2.09 billion, yielding an EBIT margin of 3.3%.