By James Davey
LONDON (Reuters) - Britain's biggest retailer, Tesco (L:TSCO), is expected to report next week that a tentative recovery in its key home market has stalled.
Its sales update on Friday, ahead of a potentially stormy annual shareholders' meeting later in the day, could also see new boss Dave Lewis formally announce that the supermarket operator is examining the possible disposal of its South Korean business, Homeplus.
Tesco has hired HSBC (L:HSBA) to explore the sale of the South Korean unit, the group's biggest business outside Britain, people familiar with the matter told Reuters this month.
Former Unilver executive Lewis, brought in last September to lead a turnaround in the company, is cutting costs and selling assets as he seeks to reduce the firm's 8.5 billion pounds ($13.5 billion) of net debt.
Analysts forecast a 2-3 percent drop in sales at British stores open over a year over the 13 weeks to May 30, the first quarter of Tesco's 2015/16 fiscal year.
That would be worse than the 1.2 percent decline in the fourth quarter of 2014/15, when the group recorded growth in UK like-for-like sales volumes for the first time in over four years, driven by price cuts and moves to improve product availability and customer service.
Analysts, however, point out that first quarter comparatives are tough because the same period last year saw aggressive vouchering activity when previous CEO Philip Clarke's team was trying to prop up sales.
Lewis has repeatedly cautioned that Tesco's recovery will not be a straight line.
Analysts at Barclays (LONDON:BARC) said a UK like-for-like sales outcome of down 2.3 percent would be a reasonable performance in the context of deflation and rivals' performances, beating Asda (down 3.9 percent) and Morrisons (down 2.9 percent) in their most recent quarters and only slightly behind Sainsbury's (L:SBRY) (down 2.1 percent).
In common with its major rivals, Tesco is battling to win back ground lost to discounters Aldi and Lidl. All players are also having to deal with record falls in product prices.
In April Tesco reported a 2014-15 group trading profit of 1.4 billion pounds, down nearly 60 percent, and said it may struggle to hit even that level in the 2015-16 year.
Industry data published this month showed Tesco's total UK sales fell 1.3 percent in the 12 weeks to May 24. That partly reflected store closures announced by Lewis in January that have now taken place.
Some investors at Friday's annual meeting may well be ready to vent their anger at Tesco management after a nightmare year, during which it issued four profit warnings, reported a record loss and saw its share price slump by over a quarter. It has also been tarnished by an accounting scandal.
However, of Tesco's board of 11 directors only four survive from last year's AGM and of that four, none hold executive positions and two will step down after the meeting.