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Tesco reports 3.7% drop in same-store sales

U.K. supermarket chain Tesco on Wednesday reported a sharp fall in first-quarter sales, hurt by price cuts and subdued consumer spending.

First quarter same-store sales, excluding fuel, fell 3.7 percent.

In a news release, Tesco, which is the grocery market leader in Britain, described the results as "in line with last year's exit rate, despite the significant reduction in untargeted promotions and deflationary impact of investment in lower prices."

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Industry price cuts have driven lower growth in recent months for the U.K. "big four" supermarkets—Tesco, Asda, Sainsbury's and Morrisons.

The latest supermarket share figures from Kantar Worldpanel, published on Tuesday for the 12 weeks ending May 25, 2014, show a slowdown in grocery market growth to 1.7 percent—the lowest level for at least 11 years.

Simon Dawson | Bloomberg | Getty Images

"To date, it is unclear whether these price cuts are part of normal industry price investment or something more material and the fact that the food commodity price index supports lower food inflation has not helped clarify the issue," said Deutsche Bank analysts Niamh McSherry and James-G Collins in a report on Tuesday.

Tesco Chief Executive Philip Clarke said on Wednesday that Tesco sales had been hit by the supermarket's own price cuts. He warned investors in a news call not to count on sales improvements in the next few quarters and said he had "never seen sales fall like this before".

"Since February, we have cut prices on the products that matter most, cut home delivery charges and made Grocery Click & Collect free," Clarke said in the news release.

"As expected, the acceleration of our plans is impacting our near-term sales performance. The first quarter has also seen a continuation of the challenging consumer trends in the U.K., reflecting still subdued levels of spending in addition to the more structural changes taking place across the retail industry."

In common with its "big four" peers, Tesco is also being pressured by Aldi and Lidl at the budget end and Marks & Spencer and Waitrose at the premium end.

Tesco shares closed around 1.3 percent lower on Wednesday.

Deutsche Bank said Tesco's results were in line with its expectations. It held its "buy" rating on Tesco stock, with a price target of £3.42.

"We expect little share price reaction to these numbers and no changes to consensus earnings forecasts," said Deutsche analyst James-G Collins in a research note.

"Management signaled in April that U.K. sales would be held back through most of this year by its U.K. price reductions (which began at exactly the start of the first quarter) and associated reduction in couponing activity... hence we did not expect an improved like-for-like trend."

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