• Group H1 pre-tax profit drops 11.6% to GBP1.66bn
  • UK trading profit down 12.4% to GBP1.12bn
  • UK lLike-for-like sales down 0.7%  

A GBP1bn (US$1.6bn) investment plan launched earlier this year to help turn around its domestic business has contributed to a decline in first-half profit at Tesco Plc, the UK's largest retailer.

A slowdown in sales in the UK also weighed on the retail giant's earnings, but it said clothing returned to growth - particularly in the second quarter - thanks to "further investment in both price and quality."

The supermarket giant today (3 October) booked an 11.6% drop in pre-tax profit to GBP1.66bn in the six months to 25 August.

In the UK, trading profit was down 12.4% to GBP1.12bn, with like-for-like sales down 0.7%. But UK sales edged up 2.2% on a total basis.

Group sales, however, edged up 1.6% to GBP32.31bn in the period, but like-for-like sales, excluding petrol, were down 0.6%.

Group operating profit slid 6.6% to GBP1.81bn, while international profits were down 17.1% to GBP378m. Tesco blamed the Eurozone crisis for sapping consumer confidence, while in Asia there is weakening consumer demand in China and its largest market, Korea, has been impacted by new opening hour restrictions.

The retailer said there were signs its UK recovery plan plan was working, with improvements in UK sales performance, including like-for-like sales growth in second quarter.

It also said clothing saw sales growth of 5.3% at constant exchange rates during the half-year, following the previous year's strong growth of 11%. The F&F clothing business now operates as a single unit across the UK, Ireland and Central Europe, which is enabling improvements in stock management, range and margin. 

"I am encouraged by our customers' initial responses to the changes we have made - but there is much more to be done," Clarke said.

He added that trading conditions "continued to be tough" across the whole of the UK market in the first half, with consumer confidence remaining at "very low levels".

Looking ahead, Clarke said: "We are planning on the basis that the global economic environment continues to be very challenging, with customers facing real financial pressures and our businesses bearing the burden of higher costs."

Neil Saunders, managing director of Conlumino, believes "the underlying issue relates, primarily, to the retail proposition, which remains below par. Tesco's store environments, its service standards and its range are all in need of improvement.

He adds: "One of the worrying signs from this update is the extent to which some parts of the international business have deteriorated: growth in Asia has slowed substantially while European sales have declined. While there are understandable reasons for this, it does suggest that Tesco is now a company fighting battles on many fronts."

Bryan Roberts, Kantar Retail's director of retail insights, suggests Tesco's numbers "tell us that its under-performance in the UK may well have bottomed out.

"The last couple of years have shown us that even the giants can falter when they take their eye off the shopper; years of underinvestment in stores and people are now being reversed by Philip Clarke and these early signs suggest that his radical investment programme is paying off.

"In the fullness of time, Tesco's recent problems are likely to be seen as an unfortunate blip...Competitors should be fearing the worst as 2013 is likely to see a resurgent Tesco looking to make up the ground it has lost."