Tesco 'disappointed' by its UK Christmas trading

Tesco shares tumbled 16% after it said it was "disappointed" by its seasonal trading in the UK.

Like-for-like sales, which exclude the effects of new store openings, fell 2.3%, excluding fuel and VAT.

Tesco warned that it expected "minimal" profit growth for the current year as it increases investment, especially in the UK.

Total group sales for the seven weeks to 7 January rose 5.2% including petrol and 4.0% excluding petrol.

The supermarket warned that its profits for the year would be "around the low end of the current consensus range".

Tesco's latest sales figures were released on a day when a whole host of UK retailers also announced how they had fared over the crucial Christmas trading period:

• Home Retail Group, which owns Argos and Homebase, reported a fall in sales and said it would cut its dividend significantly as a result. At Argos, like-for-like sales were down 8.8% in the last 18 weeks of 2011, while at Homebase sales fell 2.6%

• Chocolate maker Thorntons said like-for-like sales at its own stores were down 4.2% in the 14 weeks to 7 January

• Like-for-like sales at Halfords fell 4.8% in the 13 weeks to 30 December, as motorists cut their spending on car maintenance and improvement

• Sportswear retailer JD Sports saw like-for-like sales, excluding VAT, rise by 0.1% in the five weeks to 7 January. When VAT is included, sales were up 1.6%

• Mothercare - the babies' and children's goods group - reported a 3% drop in like-for-like sales for the 13 weeks to 7 January

• Online grocer Ocado said customer orders in the four weeks to Christmas jumped 21.9% from the previous year. The news pushed its share price up by 14%.

Price campaign

Tesco reported UK figures excluding VAT, in order to strip out the effect of the increase in VAT at the start of 2011. When VAT was included, like-for-like sales fell 1.3%.

In its statement, the supermarket chain also suggested that its spending on its Big Price Drop strategy had not been successful.

"In a highly promotional market, the volume response to our increased investment into lowering prices did not offset the deflation it has driven," Tesco said, and added that the "improvements... still had to work through fully".

Richard Hunter from Hargreaves Lansdown Stockbrokers said: "The lowering of prices did drive higher sales, but the pressure on margins rendered the promotion unsuccessful.

"Unfortunately the big price drop reported in this update will be remembered as more reflective of the shares than the campaign."

But Tesco reported online sales growth in the UK of 14%, across food and non-food.

Overseas growth

Tesco chief executive Philip Clarke said the international businesses had made good progress despite a challenging economic environment.

The retailer said it was pleased with the performance of its international businesses, although it was seeing "early signs of more cautious behaviour".

Group sales were boosted by 7% growth in Europe, 8.1% growth in Asia and 40.6% growth in the US.

Like-for-like sales in the US, where Tesco operates under the Fresh & Easy brand, grew 19.3%.

Despite the strong growth, Tesco announced earlier in the week that it was temporarily closing 12 Fresh & Easy stores in California, Arizona and Nevada because of weak local economies.

Tesco is the third of the big supermarkets to report its Christmas trading. Morrisons reported a 0.7% rise in like-for-like sales for the six weeks to 1 January, while Sainsbury's like-for-like sales grew 2.1% in the 14 weeks to 8 January.

"This was a deeply underwhelming performance by Tesco in its home market, and all the more grave, given the adverse weather conditions of December 2010," said John Ibbotson from the consultancy Retail Vision.

"Tesco's share of the market remains dominant, but is slipping. It has fallen from 30.5% a year ago to 30.1%."

Mr Clarke told the BBC's business editor Robert Peston that Tesco would invest in its UK stores over the coming year to improve the shopping experience of customers.

This is expected to involve a big increase in the number of employees per store, meaning possibly thousands of people may need to be hired.