Slowdown in sales? Tough times ahead? Not according to Tesco, which has given analysts confidence in a brighter outlook

When Tesco talks, the stock market tends to listen and the unerringly bullish tone taken by the industry bellwether at its interim results presentation on Tuesday was enlightening.

The consumer is, according to ­Tesco, showing much more resilience than its peers have been suggesting of late, and with the next move in interest rates likely to be down, underlying demand looks set to be solid at worst.

Finally some good news for the industry!

Every retailer that has spoken to the stockmarket in the past quarter has cautioned that the next few months would be tough for the industry.

The UK's biggest retailer seems to have a different and much more ­sanguine view: the summer's sales slowdown was 100% weather-related and with interest rates about to fall Tesco is looking forward to a strong sales-led second half from the UK business.

The first-half margin picture in the UK was positive and while there have been pricing initiatives, Sir Terry's view is that they were nothing out of the ordinary.

It strikes us that the benign industry gross margin situation is set to continue forthwith. So bullish noises all round for the retail sector.

As for Tesco, the interims were in line with City expectations and with a whole host of interesting new ventures about to start contributing to the P&L (China, United States, Direct) we think that Tesco is at an especially interesting moment in its evolution right now.

Analysts didn't change their forecasts on Tuesday but seeing the interim figures and hearing Tesco's tone made them even more confident of their estimates.

The UK food retail industry is set to get even more benign when the Qataris take over Sainsbury's.

The Oriel view is that the focus will turn from the top line to the bottom line at Sainsbury's, meaning there will be less focus on: price; investment in stores; and money spent on service in the outlets themselves.

It will be a straightforward task for the others to win market share under these circumstances, and the need, in the long term, to invest hard in prices will diminish.

With the consumer, at least in Tesco's view, happy enough, the margin structure of the sector seems to be in good shape.n

Jonathan Pritchard,

Partner, Oriel Securities

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