Christmas sales drop, as price-cutting fails to bring in the shoppers.
Well, I wasn't expecting to wake up this morning to a 14% fall in the Tesco (LSE: TSCO) share price. But that's what happened after the UK's leading supermarket posted disappointing Christmas trading figures, and cut back its expectations for this year and next.
We were expecting a squeeze on margins this year, and that was echoed by modest Yuletide figures from Wm Morrison (LSE: MRW) on Monday. Wednesday's update from J Sainsbury (LSE: SBRY), which was pretty upbeat and showed a 2.1% rise in like-for-like sales, gave us a glimmer of hope for the Tesco's prospects.
But that was dashed today. Excluding petrol and VAT, like-for-like sales for the six weeks to 7 January were 2.3% down on the previous year, even though 2010's cold spell kept many shoppers at home that year.
Although Tesco has blazed the price-cutting trail with its £500m Big Price Drop campaign, it backed off from promotional activity in the run-up to Christmas just as rivals were cranking it up, and that appears to have driven the shoppers away.
Profit for the full year is now expected to come in towards the lower end of current City forecasts, and for 2012/13, "substantially increased investment to deliver an even better shopping trip for customers" is expected to result in minimal profit growth for that year.
Tesco's future strategy is now set to move away from high levels of superstore openings, with a focus more towards internet sales for non-food items.
Still a fair investment
Using the lower end of current forecasts, the current share price of 330p puts the shares on a P/E of around 10. And this year's dividend, if it comes in as expected, will be about 4.7%. If we assume the worst case of no growth next year, obviously those figures won't change.
Has Tesco lost its way? No, not at all. Tesco still commands 30% of the UK's market share, with Asda coming in second place (although that share is marginally down on a year ago). It's a company focused on the long term, and this is surely just a short-term hiccup -- and the price fall may well have presented us with a nice buying opportunity over the near future.
But these figures will put pressure on new chief executive Philip Clarke, whose first Christmas at the helm will not have provided much of a boost to his popularity.
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> The Motley Fool owns shares in Tesco.