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Tesco's Q3 Poor - European Markets Wait For Data
Tesco’s 3Q update reads poorly but can’t be surprised given the difficulties the supermarket chain has had this year in refocusing its strategy whilst exiting loss making international businesses.
Group like-for-like sales dropped 1.5% in Q3, which is actually a tad better than estimates of a 1.8% drop. That said, underlying sales in every country it operates in fell during the period with
4% drop in Europe and 5.1% decline in Asia.
Tesco management blames pressure on UK household balance sheet as the reason behind the challenging grocery market, which lead the declines across business divisions. That said, Tesco appears
confident it can meet FY earnings guidance despite worries in the market of another profit warning. The market may not be to convinced however as this year’s performance has been dismal,
particularly when compared to UK rival J Sainsbury’s who saw underlying sales rise 1.5% in Q2 of 2013 while Tesco’s sales were flat.
It’s been 18 months or so since Tesco announced it will invest £1billion to revitalise the UK business which lead to an exodus out of global operations such as the US – this saw Tesco write down
around $3.5billion. Since, Tesco has been unable to deliver on earnings which has led to disappointment for investors who are now doubting the company’s ability to turn around.
Heading into 2014, there will be more pressure on Tesco to demonstrate the effectiveness of its strategy or else the market will continue to lose confidence in the retailer and its management. This
Christmas sales period should buffer up sales but it’s a competitive market out there in the supermarket world with Asda announcing it will spend £200m cutting prices in 2014 and Sainsbury’s
continues to demonstrate strong sales momentum.
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European financial markets inch up a touch but enthusiasm curbed ahead of a plethora of risk events over the next three trading sessions – in the session ahead, we have euro zone, UK and US PMI
services data pieces, euro zone GDP for Q3 as well as retail sales. In the US, we have ADP jobs data together with new home sales. Overnight, weakness in the US pressured Asian markets which traded
on a cautious note; this has fed into our session with investors taking no chances ahead of the data events lined up.
The USD spiked on Tuesday as the recent run of strong US economic data got some in the market worried that the Fed may launch tapering of QE at this month’s policy meeting. At the same time, we
have ECB and BOE meetings lined up for tomorrow, prompting further caution as investors are certain the ECB will drop some hints regarding future policy measures. Earlier, we have China’s PMI
services data which was actually poorer than expected, placing pressure on metal prices which weighs on mining stocks – UK’s heavy mining weighted index, the FTSE100 is trading flat as such.
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