UPDATE - Relief as Tesco holds line on profits guidance

Tesco’s shares rose slightly in the wake of a disappointing trading update, suggesting the bad news was already priced in.

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Tesco’s (LON:TSCO) like-for-like (LFL) sales decline in the UK in the third quarter was even worse than some brokers had been expecting.

The slumping supermarket giant said LFL sales were down 1.5% in the third quarter on a year ago, a little worse than the 1.4% decline City firm Jefferies had forecast.

The retailer blamed continuing pressures on UK household finances for the subdued state of the grocery market, and said the performance was “broadly in-line with the weaker growth seen in the UK grocery market as a whole”.

There was some good news, however, with the group reporting that its smaller, high street Express stores are enjoying LFL sales growth; this ties in with the general industry view that the days of the big edge-of-town hypermarket could be numbered.

Things are not looking much better overseas, either, with Tesco chief executive Philip Clarke conceding that the near-term trading environment remains tough, particularly in Thailand, though things have picked up a bit in Poland and Turkey.

Group sales for the thirteen weeks ending 23 November 2013 increased by 0.6% at actual exchange rates and by 0.2% at constant rates, excluding petrol. With petrol sales included, group sales decreased by 0.8% at actual exchange rates and by 1.2% at constant rates.

“Despite the challenging conditions in many of our markets, we are performing in line with market expectations for the full year,” Tesco said.

What looked like a disappointing update was nonetheless greeted with some relief by the market, with the shares edging up a fraction from Tuesday night’s closing price of 341.6p.

“Expectations were low and rightly so: the UK performance is weak and whilst certain overseas problems are out of Tesco’s hands, momentum is poor there too. However, we do believe that management is taking the right action here for the long term and stick with the positive tack,” said Oriel Securities, which has an ‘add’ rating for Tesco.

Independent retail analyst Nick Bubb took a similar tack, saying the bad news was priced in. “With management holding the line on last month’s City profit forecasts for the full-year (and therefore avoiding another profit warning), the shares should rally today,” Bubb suggested.