* Tesco Q2 UK underlying sales up 0.1 pct
* Tesco H1 trading profit down 10.5 pct, 1st decline in 20
* Tesco says encouraged by UK customers response to changes
* Sainsbury Q2 underlying sales up 1.9 pct
* Tesco shares down 2 pct, Sainsbury up 1 pct
By James Davey and Neil Maidment
LONDON, Oct 3 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
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
, which, like other British grocers, has capitalised 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 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, Morrisons, discounters Aldi and
Lidl, and upmarket grocer Waitrose.
"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.