The UK's largest retailer Tesco has had its credit rating downgraded by Standard & Poor following a "greater than anticipated" decline in like-for-like sales and lower profitability.
The retailer's results last week drew criticism after profits slid 6% in the 52 weeks to February 22, 2014, which led to Moody's credit rating agency also announcing that Tesco was being reviewed for a downgrade.
S&P revised its outlook yesterday from 'stable' to 'negative'. The rationale for the rating change was attributed to Tesco's poor performance. A statement for the agency said: "The outlook revision reflects a greater decline in Tesco's like-for-like sales in the UK than we anticipated, and lower profitability across its retail operations. In our opinion, the declining profitability and difficult trading conditions could undermine Tesco's competitive position and weaken its credit metrics to lower levels than we consider adequate for the current ratings. In our view, market conditions will remain highly competitive, particularly in the UK, which accounts for around 70% of Tesco's retail sales and profits."
Moody's vice president and lead analyst for Tesco Sven Reinke said: "We are putting Tesco's rating on review for downgrade following a 6% drop in the group's fiscal 2013-14 trading profit. The review will amongst other key considerations focus on the impact on Tesco's business of structural changes to the UK's retail market environment."
The multiple retailing environment has becoming increasingly competitive in the UK. Morrisons recently announced that savings and efficiencies equal to £1 billion will be invested in price cuts, promotions, and store improvements over the next three years. Tesco is embarking on a similar strategy to remain competitive, S&P said.
"Tesco has responded to this increased price competition with a fuel-saving scheme and an initial investment of at least £200 million in reducing prices on certain products," said the report.
Tesco's is the largest wine supplier in the UK market.