Blackfriar: Tesco will be hoping its darkest hour is coming to an end

In the case of Tesco’s Philip Clarke, the proverb in question had an unexpectedly comforting ring.

“Remember that the darkest hour is just before dawn,” said Panmure Gordon analyst Philip Dorgan, after perusing Tesco’s latest trading update yesterday.

Tesco’s shareholders will be hoping that Mr Dorgan is right, and the latest figures mark the beginning of the end of one of the bleakest eras in the company’s history.

On the face of it, the results seemed uninspiring. Tesco posted a drop in quarterly underlying sales in Britain, reinforcing the negative trends which have sent its shares lower.

According to some observers, it could place the company’s turnaround plan in doubt.

Tesco said it had been hit by weak demand for general merchandise, as Britons cut back on discretionary spending. Its performance hasn’t been helped by the fall-out from the horsemeat scandal, which forced many supermarkets to take a long, hard, look at their supply chain. Mr Clarke doesn’t need reminding that rivals Sainsbury’s and Leeds-based Asda are snapping at its heels.

Mr Clarke, who has been chief executive since 2011, has tried to turn things around by investing £1bn on more staff, new food ranges, revamped stores and lower prices.

However, sales at Tesco’s UK stores open for more than a year, excluding fuel and VAT sales tax, fell one per cent in the 13 weeks to May 25, which was at the bottom end of analysts’ forecasts. It reversed a rise of 0.5 per cent in the previous quarter, which was the strongest quarterly result in three years.

“These results go to show that even with £1bn to throw at it, there are no guarantees,” said John Ibbotson, director of retail consultants Retail Vision.

Undaunted, Mr Clarke insisted yesterday that his recovery plan was on track.

“What we’re into is long-term sustainable growth. It’s going to ebb and flow over a quarter but the direction of travel is the right direction,” he said.

Analysts estimate Tesco’s underlying non-food sales in the UK fell by a high single-digit percentage in the first quarter, while food sales were hit by the discovery across Europe of horsemeat in products labelled as beef. Tesco was one of several firms forced to withdraw some goods and apologise to customers.

For years, Tesco seemed incapable of putting a foot wrong, as it built up a commanding market share and impressed the City with its results.

The last few months have provided a rude awakening to those who believed that Tesco’s rise was inexorable, and it could shrug off challenges that would flatten its rivals. Its overseas ventures haven’t always proved successful. Two months ago, Tesco announced that it was ditching plans to open more than 100 stores after announcing its first fall in profits in 20 years.

At the same time, the company also revealed that it planned to sell off its ill-fated US business Fresh & Easy. Fresh & Easy, which has 199 stores, has absorbed more than £1bn in capital since its launch in 2007 when Tesco was run by Mr Clarke’s predecessor Terry Leahy.

It has never made a profit.

Abandoning the loss-making business will involve £1bn in restructuring and one-off costs.

Tesco also wrote down the value of its UK property by £804m and its Polish, the Czech Republic and Turkish operations by £495m.

Faced with these challenges, Mr Clarke has acted decisively, which explains why Mr Dorgan feels confident about its future.

In March, Mr Clarke told a conference of farmers that Tesco plans to shorten its supply chain after horsemeat was found in some of its products.

He said: “Where it is reasonable to do so, we will source from British producers.”

Tesco is hoping to improve the shopping trip through brand relaunches, store makeovers and hiring more staff.

Yesterday, Mr Dorgan said he believed Tesco’s management was beginning to get a grip on the steering wheel, and it now has a clearer view of how its stores and online offer will develop.

This may be true, but wider economic trends are unlikely to prove helpful to major UK retailers. Yesterday, Mr Clarke said he was not expecting UK economic conditions to improve in the near term, despite a survey which reported that retail sales rebounded in May.

Mr Clarke also said Tesco was reducing its exposure to weaker categories like consumer electronics, and increasing its focus on higher growth, higher margin categories like clothing.

Sadly, Tesco’s problems aren’t limited to Britain. It’s experienced weaker demand in China, and restrictions on trading hours in South Korea.

Its vast scale, which has always been a source of strength, also makes Tesco vulnerable to headwinds affecting the global economy. For Tesco, the dawn cannot come soon enough.