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Wheels Coming Off Trolley for Grocer's?

The UK’s food retailers have defied expectations of slower profits and sales for months.

Tesco reported a 12 percent increase in annual profit in its most recent fiscal year, which beat analysts' expectations. Last week William Morrison, the UK’s fourth-biggest supermarket group delivered a 7-percent rise in first-quarter like-for-like sales, excluding petrol. Even Tesco's biggest rival Asda said that its sales improved in May with like-for-like sales in their first three months of the year, excluding petrol, growing 5 percent.

The British Retail Consortium's figures for May support the idea that the UK consumer has continued to shop even as credit conditions have tightened and inflation has risen, threatening to cut into disposable income.

The May data showed UK retail sales values rose 1.9% on a like-for-like basis, compared with May 2007. But the Director General of the BRC, Stephen Robertson, told Squawk Box Europe that he thought the number was a blip and declining consumer confidence pointed to weaker months to come.

In terms of stock price performance, over 12 months Tesco has tracked the FTSE-100, down about 10 percent for the year as a whole. It shouldn't be a surprise that the two are closely tied. With 31 percent market share Tesco is about as correlated to the UK economy as it is possible to get.

Well, maybe Tesco's latest sales numbers are a warning sign that consumer spending patterns have changed. Sales rose 3.5 percent in the 13 weeks ending on May 24th, which was at the bottom end of expectations. Non-food sales in particular rose more slowly than the food segment, which is a turnaround on the trend in recent years.

The food retailers have already had a weak 2008, shedding 18 percent this year, but the market appeared to be surprised by the Tesco news and drove the share price down another 2 percent at the open.

Tesco cut prices on 12,500 products in the first 3 months of the year to keep customers coming through the doors. But despite that, the sales figure was at the lower end of the range.

It seems the performance of the business is starting to reflect the declines already built into the share price.

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