Tesco, the UK's largest retailer, has reported falling profits for the first time in 18 years, its latest financial statement has revealed.
The supermarket giant, which shocked investors with its first profit warning in 20 years in January, prompting many to ditch the stock, has reported its first fall in profits since 1994.
The group blamed the weakness on a slowdown in UK sales and the cost of a £1bn turnaround plan aiming to halt the decline.
Pre-tax profits slumped by 11.6% to £1.7bn in the first half of 2012, which the group attributed to weaker sales in Europe and Asia.
But the company's chief executive Philip Clarke, said he was "encouraged" by customer reaction to the firm's turnaround plan, known as ‘Build a Better Tesco'.
The plan has involved hiring 8,000 extra staff, the modernisation of 230 stores and the expansion of the retailers' meat, bakery and frozen food ranges, in addition to the increased use of Clubcard offers and the expansion of the firm's online service.
Today's numbers signalled some improvement as like-for-like sales for the second quarter showed a 0.1% rise, following a 1.5% slump in Q1. Group sales were also up 1.4% to £36bn.
Tesco attributed this improvement to the continued success of its online grocery business, which has grown by 11% this year. The service is now offered in Poland and Slovakia, with Thailand and Malaysia launching soon.
"We continue to act decisively to tackle challenges and seize opportunities across the group," said Clarke. "In April, I set out our plans to 'Build a Better Tesco' in the UK. We have been hard at work and I am encouraged by our customers' initial responses to the changes we have made - but there is much more to be done."
However, Clarke acknowledged the weakness of the global economy is taking its toll on the supermarket.
"The external environment continues to present challenges all over the world. While our businesses in Asia and Europe have continued to do a great job for customers, our financial performance there reflects the tough economic backdrop and particularly the regulatory changes in South Korea. That we have gained or held market share in the majority of markets is a testimony to the skill of our teams across the group," he added.
Meanwhile Sainsbury's, the UK's third largest retailer behind Tesco and Asda, has reported better-than-expected sales for the second quarter.
Like-for-like sales, excluding fuel, were up 1.9%, beating analyst expectations of a 1.4% rise. Total sales had increased 4.3%, or 4.4% excluding fuel.
Sainsburys chief executive Justin King attributed the rise to strong sales during the summer's Jubilee celebrations and the Olympic games.
"We are seeing the benefit of our ongoing investment in our own-label ranges, particularly by Sainsbury's, which is growing at its strongest rate in recent years, and our Taste The Difference range, which is seeing near double-digit growth. Our own label penetration is increasing at a faster rate than any of the major supermarkets; a testament to the investment we have made in the quality of our products," said King.
Meanwhile another of Tesco's key competitors seems to be gaining traction after German discount chain Aldi issued strong numbers this week, reporting a 200% rise in profits in 2011 to £57.8m.
But according to retail consultancy Kantar Retail, Tesco's numbers signal that weakness in the UK economy could 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," said Bryan Roberts, Kantar Retail's director of retail insights.
"But these are early days - as we have already heard from Aldi this week, competitive pressures are only going to intensify and Tesco must ensure whatever improvements it makes to products, stores and service are well communicated to shoppers," he added.
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