Tesco sales fuel fears over consumer spending

Tesco disappointed investors yesterday by reporting a lower-than-forecast growth over Christmas, fuelling City fears about a slow-down in consumer spending.

The supermarket giant posted a like-for-like sales growth of 3.1 per cent over the six weeks to 5 January, failing to match recent figures from its rivals Asda and J Sainsbury and missing City forecasts of a 3.5 to 4.5 per cent growth.

Debenhams also struck a note of caution about the "fragile state of consumer confidence" yesterday as it said that like-for-like sales for the 18 weeks to 5 January were flat. Blacks Leisure, meanwhile, revealed the worst report card. The company, which operates the Millets and Blacks stores, saw sales of its Freespirit and O'Neill boardwear brands slump by almost 11 per cent in the six weeks to 12 January.

Tesco's finance director Andrew Higginson joined other retailers in calling for a cut in interest rates to boost consumer confidence. He also defended the supermarket group's numbers as evidence of "solid trading".

"I don't think people should underestimate the size of the business," he said, "Most retailers would give their right arm for the sort of growth we experienced."

He added: "Of course, you've seen the customer being more cautious over the past two years. They tightened their belts and now they are tightening it by another notch or so."

Tesco shares fell by 3 per cent, or 13p, to 407p, yesterday while its rival Sainsbury, which recently reported a 3.7 per cent like-for-like sales growth over Christmas, bucked the falling market to rise by 1.8 per cent. Analysts yesterday said Tesco had lost out to Morrisons, which is due to update the market on its Christmas trading next week.

"Morrisons had a better Christmas than everyone, well done to them," said Mr Higginson.

Mr Higginson also outlined an aggressive strategy for the lucrative North American market. He said that the company was planning to supplement its stock of 28 "Fresh&Easy" stores with 50 new openings by next month. An additional 100 stores are slated to debut in the year from March 2008.

Unlike Tesco, Debenhams did better than expected. Sales for the four weeks to 5 January were up by 4.4 per cent compared with last year, while like-for-like sales increased by 2.2 per cent. Designer goods sold the best over Christmas, helping Debenhams increase its market share. The company did, however, express concern about the unfolding retail climate.

Debenhams' chief executive, Rob Templeman, said that the high street was witnessing "much deeper discounts" as it sought to entice customers.

"The fragile state of consumer confidence leads us to view the future with caution and we are running the business on the basis that market conditions will remain difficult", he said.

Analysts at Merrill Lynch expressed similar sentiments about Debenhams' prospects, noting that despite better management it was the company's "misfortune that the market downturn will take its toll on profit in the current year".

Blacks Leisure Group is also worried about the outlook for 2008 and said it planned to implement £3m-worth of cost-saving measures to weather the storm. Chief executive Neil Gillis said the measures, which were aimed at reducing overheads at the company's head office, would "principally include job cuts".

Blacks' seasonal round-up revealed that in the 19 weeks to 12 January, like-for-like retail sales were down by 1.2 per cent, while total retail sales dropped by 1.5 per cent. A warning that the profits for the current year were likely to come in below market estimates sent the Blacks' share price down by 10p to 150p.

Commenting on the update, Mr Gillis said that problems with boardwear brands had stolen attention from business at the Millets and Blacks stores, which remained healthy in spite of fewer discounts compared with last year.

"We have to sort out the Freespirit [boardwear] brand," he said, "It's beginning to look tired. We're trying new formats for the stores this year and they should be ready for implementation by 2009.

"We're also looking at the Millets and Blacks stores, which tend to sit next to each other on the high street and therefore compete. The idea to is to separate them and we're already testing formats with two new Blacks stores in London."

Blacks said that it would also embark on a process of "range-rationalisation". The company said that it would reduce its range as the current structure was driving costs and detracting from the in-store environment.