Tesco, Britain’s largest grocer, unveiled modest UK sales growth in the first half of just 2.7 per cent to £20.6 billion while overall profit before tax edged up just 1.5 per cent to £1.42 billion.

Sir Terry Leahy, the chief executive, said the supermarket giant was successfully tackling the “challenges of recession”.

“Last year’s acquisitions — Homever in Korea and Tesco Bank — are already making good contributions to sales and profits,” he said, although he acknowledged that the overseas stores had been hard hit.

“In International, the markets with the greatest growth potential for the long-term have been some of the hardest hit in the short-term but we have nevertheless delivered a good performance against strong headwinds,” he said.

Trading profit in Europe fell 5 per cent to £191 million, hit by economic problems in Hungary and Ireland, and at its fledgling US chain, Fresh & Easy, losses increased by 42 per cent to £82 million.

“Our UK business is delivering solid growth and improving volumes,” Sir Terry said.

He said UK like for like sales growth of 2.7 per cent, or 3.7 per cent excluding VAT, was “converging” with figures seen across the grocery industry, driven by strong volumes.

But he admitted that sales growth had moderated in the second quarter — June, July and August — compared with the first, reflecting reduced inflation.

Tesco is raising the interim dividend by 9 per cent from last year to 3.89p per share.

Sir Terry said that he was renaming Tesco Personal Finance — which offers insurance and credit cards from larger stores — as Tesco Bank to reflect “our longer term objective of creating a full-service retail bank for Tesco customers, offering a range of banking and insurance services through branches in store and online”.

The Government hopes that Tesco will be among those showing an interest in buying the branch network and mortgage origination services of Northern Rock which it intends to put up for sale.

Tesco set up Tesco Personal Finance as a joint venture with Royal Bank of Scotland but bought RBS out of the venture last year.

In the past six months Tesco Bank made £115 million trading profit on a £420 million turnover. Sir Terry said that this was a “good performance” in a challenging retail banking market, despite extra costs as it relocated to its own offices in Edinburgh and builds its team “in preparation for a faster rate of growth”.

It grew the total number of customer accounts by 300,000 in the past 12 months to more than 6 million across all product lines and Tesco is now the seventh largest credit card issuer in the country.

But bad debts increased to £92 million, though Sir Terry said this was better than the banking industry average.

Speaking about the group as a whole he said: “This progress across the group, combined with our strong financial position funding continued investment in new space and new businesses, means we’re well-placed for the global recovery.”

Tesco has had a raft of promotions in recent weeks in what some analysts have seen as a sign that it was desperate to keep its comparable sales growing.

Dave McCarthy, an analyst with Evolution Securities, began coverage of Tesco with “sell” advice yesterday saying “Having lost momentum in the UK, sales are underperforming the industry average, marginal returns are falling and importantly, the industry is returning to adverse differential inflation (costs rising faster than sales), which could be bad news for all.”

Source : The Times

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