* Tesco Q2 UK underlying sales up 0.1 pct
* Tesco H1 trading profit 1.6 billion pounds, down 10.5 pct
* Tesco says encouraged by customer response to changes
* Sainsbury Q2 underlying sales up 1.9 pct
* Tesco shares down 1.2 pct, Sainsbury flat
By James Davey and Neil Maidment
LONDON, Oct 3 Tesco, Britain's biggest
retailer, showed its fightback plan following a shock profit
warning was starting to make a difference as it stemmed sales
falls, but its performance was outshone by rival J Sainsbury
Tesco, the world's third-largest retailer behind France's
Carrefour and U.S. leader Wal-Mart, launched a 1
billion pound ($1.61 billion) recovery plan in April to reverse
a steady decline in UK market share to Wal-Mart's Asda,
Sainsbury and Morrisons.
Tesco, which accounts for more than one in every 10 pounds
spent in British shops, stunned investors in January with its
first profit alert in more than 20 years. It said on Wednesday
it had ended 18 months of underlying sales declines with a tiny
rise in its second quarter.
But the Tesco result was overshadowed by Sainsbury,
Britain's No. 3 grocer, which reported a 31st consecutive
quarter of underlying sales growth, beating analysts'
Both Tesco and Sainsbury expect the tough UK economic
backdrop to persist, as consumers' disposable incomes are
squeezed by government austerity measures and wage growth lags
behind rises in prices, particularly for fuel.
Tesco, which earns nearly 40 percent of its trading profit
outside Britain, also highlighted a particularly difficult
economic backdrop in Asia and central Europe, previously
fast-growing regions where it is hoping to expand.
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.
Shares in Tesco were down 1.2 percent at 0938 GMT, while
shares in Sainsbury were flat, outperforming a FTSE 100 index
down 0.3 percent.
Tesco said sales at UK stores open more than a year,
excluding fuel and VAT sales tax, rose 0.1 percent in the 13
weeks to Aug. 25, its fiscal second quarter.
That compares with analysts' average forecast of flat sales
and represents an improvement on a first-quarter decline of 1.5
In the five months since Tesco CEO Philip Clarke launched
his fightback plan, the firm has recruited 8,000 more permanent
staff to give customers better service, devoted more store space
to food, given stores a warmer look and feel, revamped food
ranges and invested more in lower prices, money-off vouchers and
marketing, making better use of customer information gleaned
from its Clubcard loyalty scheme.
The firm, which trades from nearly 3,000 UK stores, has also
stepped up spending on internet and smartphone services,
expanding its online range and rolling out its Click & Collect
service of buying online for pick up in store.
"I am encouraged by our customers' initial responses to the
changes we have made - but there is much more to be done," said
The UK investment was largely responsible for Tesco's first
fall in profits in nearly two decades.
First half group trading profit fell 10.5 percent to 1.6
billion pounds, while UK trading profit fell 12.4 percent to 1.1
billion pounds - both in line with analysts' expectations.
Sainsbury said sales at stores open more than a year,
excluding fuel, rose 1.9 percent in the 16 weeks to Sept. 29,
its fiscal second quarter.
That beat analysts' average forecast for it to match its
first quarter rise of 1.4 percent.
The firm has been outperforming rivals, helped by strong
growth online and in smaller convenience stores.
Sainsbury has also benefited from the success of its "Brand
Match" pricing promotion, own-label food ranges, market share
gains in general merchandise and a shrewd decision to sponsor
the hugely successful London Paralympic Games.
Tesco's problems are not confined to intense competition in
Britain. Questions remain over its long-term commitment to U.S.
chain Fresh & Easy where trading losses narrowed by just 1
million pounds to 72 million pounds.
Also 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.