Tesco 'on road' to recovery, says CEO Philip Clarke

Tesco reported a fall in group profits today (GETTY IMAGES)

Tesco insisted its UK business was on the road to recovery today despite the supermarket giant's first drop in profits in two decades.

After six consecutive quarters of falling like-for-like sales, the UK's biggest supermarket chain eked 0.1% growth in the second quarter of its financial year as its £1 billion turnaround revamp launched.

But the significant investment - spent on a range of initiatives from 8,000 extra staff to launching its Everyday Value range - took a chunk out of its UK profits, which slid 12% to £1.1 billion in the six months to August 25.

And to compound its woes, Tesco's international arm, once the driving force behind the group, saw profits fall 17% to £378 million as shopping restrictions in South Korea and the eurozone crisis hit Asia and Europe respectively.

As the group revealed a 12% drop in overall group pre-tax profits to £1.66 billion, chief executive Philip Clarke said: "I wouldn't say we've turned a corner, but we're definitely on the road."

An increased use of targeted offers, using the data collected through its Clubcard promotion, and strong growth in its online grocery business were behind the improved like-for-like performance in the UK, Mr Clarke said.

He updated on the progress made with its turnaround plan, unveiled in April shortly after the group issued its first profit warning in 20 years, although added there was "much more that can be done".

More than 230 stores have undergone "refresh work", ranging from signage and colour-scheme changes to comprehensive refits including more use of wood, warmer colours and improved lighting.

The new Everyday Value range, which replaced Tesco Value, covers 550 items, with 80% of customers purchasing the products, while the group is part way through revamping its core Tesco label range of more than 8,000 products.

The website saw sales up 11% compared to the same period last year, while more than 70,000 customers have signed up to its delivery saver subscription service - offering customers the option to pay for delivery charges up front at a discount.

But shares fell 1% as analysts warned the strategy was long-term and the UK turnaround plans would continue to heap pressure on the supermarket's profit margins.

Philip Dorgan, analyst at brokers Panmure Gordon, said the UK recovery was "on track" but would take time.

He said: "Getting the UK back onto a recovery path is all about doing 1,000 things 1% better, rather than having a wonderful store format that will save the company.

"Therefore, there are changes to staff numbers, staff hours, own label ranges, store layout and signage, the localisation of ranges, personalisation of offers through Clubcard and marketing strategy, all of which should feed through to a proposition that is in line with customers' needs and requirements."

The group said slow sales in Poland, the Czech Republic, Hungary and South Korea were behind the slide in international profits and sales.

Sunday trading restrictions in Korea hit the business there hard, while high tax in Hungary and the Czech Republic were partly to blame for the European business profile.

And its troubled US chain Fresh & Easy continued to be loss-making, losing £74 million in the period, a 1.4% improvement on last year.

PA