Tesco to revert to quarterly sales decline

By James Davey

LONDON (Reuters) - Britain's biggest retailer, Tesco <TSCO.L>, is expected to slip back to an underlying sales decline when it publishes first-quarter trading figures on Wednesday, raising doubts about a costly recovery plan for its home market.

Analysts are forecasting sales to have fallen 0.5 to 1 percent at British stores open more than a year, excluding fuel and VAT sales tax, for the 13 weeks to May 25, according to a Reuters poll.

That would be a reversal of the rise of 0.5 percent in the fourth quarter of the previous financial year, which was Tesco's best quarterly outcome in three years.

Tesco, whose profit fell for the first time in two decades in the year that ended February 23, has spent 1 billion pounds ($1.5 billion) on a fight back plan for Britain, where it makes over 60 percent of revenue and profit.

Its turnaround plan has focused on more staff, refurbished stores, revamped food ranges and price initiatives - all aimed at reversing years of underinvestment and halting a loss of share to "big four" rivals as well as discounters like Aldi and upmarket player Waitrose <JLP.UL>.

A squeeze on shoppers' incomes, poor weather, Europe's horsemeat scandal and a greater focus than rivals on non-food items are likely reasons for the expected drop in first-quarter sales at Tesco, the world's third-biggest retailer after Wal-Mart <WMT.N> and Carrefour <CARR.PA>, analysts said.

Tesco's shares, up 21 percent over the last year, were the biggest fallers on the blue-chip FTSE 100 index <.FTSE>, down 2.5 percent by 8:30 a.m. ET on Monday.

Britain's supermarkets, despite their focus on essential goods, have been hurt by the economic downturn and are battling for market share.

Tesco has been hit more than rivals, in part because it sells more discretionary goods like homewares and electricals where shoppers have been cutting back most.

Analysts reckon Tesco also suffered in its first quarter because poor weather meant shoppers shied away from seasonal ranges and said trading may have been hit by the discovery across Europe of horsemeat in products labeled as beef.

Tesco was one of several companies forced to withdraw some goods and apologize to customers.

"We believe Tesco is still struggling to change consumer perceptions of quality and price ... and that non-food sales ex clothing are continuing to act as a drag on the business," said Espirito Santo Investment Bank analyst Caroline Gulliver.

Last month Britain's No. 4 grocer, Wm Morrison <MRW.L>, posted a 1.8 percent fall in first quarter like-for-like sales, while No. 2 player, Wal-Mart's Asda reported a 1.3 percent rise, albeit for different trading periods.

No. 2, J Sainsbury <SBRY.L>, is scheduled to make a trading update on June 12.

As well as falling sales in Britain, analysts expect Tesco to report further like-for-like declines in central Europe, hit by recession in the euro zone, and in Asia where it has been hindered by restrictions on trading hours in South Korea, its largest overseas market.

"The UK still lacks momentum and international is going from bad to worse," said Investec analyst Dave McCarthy.

In April, Tesco wrote down the value of its global operations by $3.5 billion and confirmed it would exit the United States.

(Reporting by James Davey; Editing by Erica Billingham)