Tesco makes £1.9bn profit despite UK sales dip

Tesco revealed its worst sales performance in two decades today after shoppers tightened their belts and rivals attacked its market dominance.

The grocery giant said sales excluding new store space, VAT and petrol were down 0.9% in the three months to August 27, with electronics and entertainment products particularly badly hit.

The performance was broadly in line with City forecasts but was still overshadowed by rival Sainsbury's, which impressed analysts by continuing to grow sales over the same period.

Tesco launched its fightback last month with £500 million of price cuts after seeing its market share shrink from 30.8% to 30.4% in recent weeks as it battles to stimulate demand during the toughest conditions "in a generation".

Despite the worsening situation in the UK, the group recorded a 12% rise in underlying profits to £1.9 billion in the half-year, boosted by a strong performance in Asia. Sales rose 9% to £35.5 billion.

Meanwhile, Sainsbury's said same-store sales including VAT increased by 1.9% in the 16 weeks to October 1 - the same rate as in the previous quarter. Measured in this way, Tesco's sales would have been flat in the second quarter.

Sainsbury's, which recently changed its slogan to Live Well For Less, hailed its performance as "good" despite a tough consumer environment. Total sales were up 8%, boosted by its 400 Sainsbury's Local convenience stores, which saw growth of 20%.

Dave McCarthy, an analyst at Evolution Securities, said: "This is not a bad performance from Sainsbury's and puts it ahead of Tesco but behind Morrisons."

Tesco chief executive Philip Clarke, who took over from Sir Terry Leahy in March, said sales growth was slower than planned but was still "a robust performance".

Like-for-like sales in food were positive in the first half, but its performance was dragged down by a 0.9% decline in non-food sales, particularly electronics and entertainment items - two of its largest product groups.

It plans to revitalise non-food sales by improving its range, pricing and promotions.

Total UK sales, which include VAT, petrol and the benefit of new store openings, grew 7% to £23.4 billion, which it said was faster than the market as a whole. UK trading profits rose 5% to £1.3 billion but are expected to flatten out in the second half of its financial year.

It still plans to create 7,000 jobs in the UK this year through its store expansion plans.

The group's Big Price Drop has reduced the cost of 3,000 items in a bid to win back shoppers and arrest recent declines in market share, although it has been criticised for not being bold enough.

Tesco promised that there will be "more change to come" but warned sales would not pick up immediately.

Mr McCarthy added: "Our overriding impression is that the UK business remains disappointing and we are unconvinced that enough has been done to put it back on track.

"We are concerned strategically on Tesco. We had hoped that the Big Price Drop would be a significant event, but it looks increasingly disappointing.

"We think Tesco should have invested a lot more and taken more pain to reposition itself."

Tesco also confirmed it will postpone the expansion of Tesco Bank as it makes sure its systems work correctly before it launches mortgages and current accounts.

It had originally said it would roll out the expansion by this autumn, but altered plans after customers were locked out of online savings accounts in the summer when it migrated them to new systems.

The bank has increased its provision to cover the mis-selling of payment protection insurance by £57 million to £92 million. This reduced banking profits by 66% to £44 million, although revenues increased 10% to £522 million after it grew savings, credit cards and motor insurance customers.

While Tesco is going through hard times in the UK, overseas the picture was brighter. Its Asian business saw sales rise 12% to £5.6 billion, with profits up 18% to £292 million, driven by strong growth in China and Thailand.

Europe also saw sales increase 8% to £5.7 billion, while trading profits rose 7% to £237 million despite tougher conditions in Ireland and Hungary.

It reported "promising early signs" at its US Fresh & Easy business, adding that its plan to break even by the end of its 2012/13 financial year remained on track. The venture's sales increased 32% to £304 million, while losses reduced by 16.8% to £73 million.

However, it recently put its Japanese business up for sale because it did not think it was "scalable".

Mr Clarke said: "I am pleased that excellent growth in Europe and Asia as well as an encouraging performance in the US have supported further progress in the first half despite the challenges of subdued demand in the UK, particularly in non-food."