Optimistic Tesco lifts payout and pleases City: Decision to depreciate stores trims profits to pounds 435m - Return of customers may signal truce in high street price war

TESCO, the supermarket group, hinted that the price war on Britain's high streets may have abated when it reported a 'pleasing improvement' in its margins so far this year. But it warned it will be some time before the market stabilises.

The group launched a series of price promotions last year, including a discount range of products under the Value label, as well as investing in training and store staff to improve customer service. These initiatives cut operating margins from 7.6 to 7.2 per cent in the year to 26 February.

Since then gross margins have risen, but David Malpas, managing director, warned it was too early to predict the pattern for the rest of the year. 'Business will remain competitive and it will be difficult to grow margins.'

He said he believed the price cuts and service improvements were attracting customers back into the store and encouraging them to spend more. 'We did become a bit productivity-driven, a shopping machine rather than a pleasant place to shop. And it is true we lost a few customers. But it is also true that we have worked hard and done a lot to win them back.'

His comments came as the group revealed that profits had dropped from pounds 558m to pounds 435.5m. But that was due to the group's decision to start depreciating its stores, and to a write-off of land premiums, and Mr Malpas said underlying profits were similar to last year's at pounds 528.4m. Earnings per share, excluding the property charges, were 18.8p compared with 18.32p. The dividend is increased from 7.1p to 7.75p with a 5.3p (4.85p) final. The results were in line with expectations, but the group's comments on current trading pleased the City and the shares gained 3p to 218p.

Sales rose 13.8 per cent to pounds 9.2bn, including a pounds 280.2m contribution from Catteau, the French retailer. In the UK chains, sales were 10.3 per cent higher at pounds 9bn, although 7 per cent of the improvement was due to new store openings.

Tesco said the second half was particularly strong, with an underlying increase in volume of 2.3 per cent, continuing into the current year.

The group opened 26 new stores, including nine smaller stores and three Metro stores in town centres, bringing the total to 430. A further 30 will be opened this year, half of them Metro or smaller stores.

The group intends, however, to scale back development plans. This year, capital spending is likely to fall to about pounds 630m compared with pounds 779m last time. It will also concentrate more on smaller superstores and Metro stores.

Borrowings at the year-end were pounds 735.7m, equal to 26.8 per cent of net assets, compared with 17.5 per cent in February 1993.

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