LONDON (Reuters) - Britain's biggest retailer Tesco halted an 18-month slide in UK sales, though the billion pounds ($1.6 billion) it is spending to do so meant profits fell by more than 10 percent in the first half, the first decline in 20 years.
The company said the 0.1 percent rise in underlying sales in the second quarter - an improvement from a 1.5 percent fall in the first quarter - meant its costly plan to bring customers back by adding staff and smartening up its stores was working.
But hard economic conditions in both Britain and foreign markets where it aims to expand means rough times still loom.
Tesco's difficulties were underscored by better-than-expected sales figures at rival J Sainsbury (SBRY.L), which, like other British grocers, has capitalized on Tesco's troubles by promising to match its signature low prices.
Shares in Tesco were down 2 percent at 1437 GMT, while shares in Sainsbury were up 1.1 percent, outperforming a flat FTSE 100 index.
Tesco is the world's third-largest retailer behind France's Carrefour (CARR.PA) and U.S. leader Wal-Mart, and accounts for more than one in every 10 pounds spent in British shops.
It stunned investors in January with its first profit alert in more than 20 years, and in April it launched its recovery plan to reverse a decline in UK market share to Sainsbury, Wal-Mart's Asda (WMT.N), Morrisons (MRW.L), discounters Aldi and Lidl, and upmarket grocer Waitrose JLP.UL.
"Customer perceptions of service, quality and availability have begun to show some early signs of improvement," Tesco CEO Phil Clarke told reporters.
"Our first target is to be performing in line with the (UK) industry in like-for-like terms."
In the five months since Clarke launched his fightback, the firm has recruited 8,000 more staff to give customers better service at its 3,000 UK stores, devoted more store space to food, given stores a warmer look and revamped food ranges.
It has spent more on money-off vouchers and marketing that makes use of customer information gleaned from its Clubcard loyalty scheme, and rolled out a new service to let online shoppers collect their orders at the store.
"The signs are encouraging but the plan is a long course of treatment for us, it's not a single dose, we've got a long way to go," said Clarke, a Tesco career lifer who as a youth stacked shelves in a local store managed by his father.
As a result of the new costs, first half group trading profit fell 10.5 percent to 1.6 billion pounds, and UK trading profit fell 12.4 percent to 1.1 billion pounds - both in line with analysts' forecasts.
Tesco now earns nearly 40 percent of its revenue outside Britain, but its outlook abroad is also worrying. Questions remain over its long-term commitment to U.S. chain Fresh & Easy where it failed to narrow trading losses. Some analysts believe a humiliating retreat could be on the cards.
"I'm very clear that Fresh & Easy needs to be able to demonstrate it can be a positive return for shareholders," said Clarke. "I hope that our investors understand that."
In South Korea, Tesco's biggest overseas market, legislation allowing local governments to impose shorter trading hours is hurting sales, with the firm warning it would knock 100 million pounds off 2012/13 profit.
In Central Europe the firm's trading profit slumped 28 percent as consumer confidence, particularly in Hungary, Czech Republic and Poland, was dented by euro zone instability.
"There is little in these results to give investors confidence Tesco will return to being a double digit growth story in the near term," said Espirito Santo Investment Bank analyst Caroline Gulliver
Britons have been cutting back on non-essential spending as their incomes suffer the worst squeeze for more than 30 years on the back of soaring food and fuel prices, higher taxes as a result of government austerity measures, and slow wage rises.
Both Tesco and Sainsbury said they see little respite for UK consumers any time soon. That is bad news for an economy that tipped back into recession in the first quarter and is heavily reliant on consumers to drive growth.
The tough times have squeezed mid-market Tesco from both sides, benefiting heavy discounters like Lidl and Aldi as well as higher-end grocers.
While Tesco's shares have fallen 12 percent over the last year, Sainsbury's have risen 26 percent, recently buoyed by the return of speculation regarding a possible renewed bid attempt from Qatar, which now holds a 26 percent stake.
Sainsbury said its second quarter underlying sales rose 1.9 percent, with growth accelerating from the first quarter.
The firm has been outperforming rivals, helped by strong growth online, in smaller convenience stores and in non-food areas. It also said a decision to sponsor the successful London Paralympic games had also paid off.
($1 = 0.6196 British pounds)
(Reporting by James Davey and Neil Maidment; Editing by Peter Graff)