Tesco (LSE: TSCO.L - news) , Britain’s biggest retailer, has reported its first fall in profits since 1994 due to a slowdown in sales in the UK, the cost of a £1bn turnaround plan to halt that decline, and pressure on its international businesses.
Tesco said pre-tax profits fell 11.6pc to £1.7bn in the half-year to August 25, with the supermarket group’s UK and international businesses suffering a fall in like-for-like sales.
However, Philip Clarke, chief executive, said he is “encouraged” by customer responses to the UK turnaround plan, which the company has called ‘Build a Better Tesco’.
Tesco has hired 8,000 extra staff in the UK, modernised 230 stores, and is expanding its meat, bakery and frozen food ranges.
Like-for-like sales in the UK suggest the plan is working for Tesco. After a 1.5pc fall in like-for-likes in the first quarter, Tesco said sales rose 0.1pc in the second quarter excluding fuel and VAT.
Mr Clarke said it is "far too early" to say Tesco has turned a corner in the UK, but that the company is making progress.
Mr Clarke said: "We continue to act decisively to tackle challenges and seize opportunities across the group.
“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.
"The external environment continues to present challenges all over the world.
“Whilst our businesses in Asia and Europe (Chicago Options: ^REURUSD - news) 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."
Tesco's international business, which covers Europe, Asia, and the US, is under pressure from the eurozone crisis and political uncertainty.
In Asia, like-for-likes sales fell 1.4pc and trading profits by 1.7pc after the South Korean government restricted Sunday opening hours for supermarkets.
South Korea is Tesco's biggest international market and Sunday is the peak trading day in the country, accounting for more than 20pc of business.
Tesco said: "While some legal challenges have been upheld against the restrictions in recent weeks, we expect any respite to be temporary and therefore the impact on sales and trading profit to continue through the second half."
In Europe, the eurozone crisis is affecting sales in Hungary, Czech Republic and Poland, where economic growth has halved.
Like-for-like sales rose 5.2pc for Tesco in the US, where it operates as Fresh & Easy. However, the supermarket group remained stubbornly in the red, reporting a trading loss of £74m.
Mr Clarke has set a target of Fresh & Easy making a profit by 2014.
He said the company is "focusing all of our efforts on driving forward the profitability of our existing stores" and will now slow store openings. Fresh & Easy will have 200 stores in total at end of the year, instead of the 230 planned at the start of the year.
"This move, together with a number of other measures we have already put in place to reduce costs, will lead to a more significant reduction in losses in the second half," Mr Clarke said.
"Notwithstanding these measures, further steps are being reviewed to accelerate the pace of improvement. In the meantime, new capital investment will be tightly constrained."