Tesco Profit Reels as UK Sales Fall

LONDON--Tesco PLC (TSCO.LN) said Wednesday it expected the global economic environment to remain very challenging as it reported a drop in first-half net profit, dragged down by sluggish sales and the cost of a 1 billion pound ($1.61 billion) U.K. turnaround plan.

"The external environment continues to present challenges all over the world," Chief Executive Philip Clarke said. "I am encouraged by our customers' initial responses to the changes we have made--but there is much more to be done."

Mr. Clarke pledged in April to fix Tesco's domestic operation through investment in stores, people and products, but clawing back lost customers has proved difficult, especially in the current economic climate where brand loyalty has been usurped by a search for value.

Tesco's U.K. sales excluding fuel in stores open more than a year--seen by experts as the key indicator of the success of Tesco's turnaround plan--fell 0.7% in the six months to Aug. 25, but showed signs of improvement in the second quarter, rising 0.1%.

Tesco posted a net profit of 1.28 billion pounds ($2.06 billion) in the period, compared with GBP1.38 billion a year earlier, on revenue that was 1.6% higher at GBP32.31 billion.

Another area of ongoing concern for Tesco is its U.S. venture Fresh & Easy, which posted another--albeit smaller--loss and is yet to show a profit since launching in 2007.

Tesco's slow progress was thrown into harsh light by U.K. rival J Sainsbury PLC (SBRY.LN), which reported a 1.9% increase in same-store sales in the second quarter, as its focus on online growth and "brand match" pricing promotion continued to pay off.

Write to Peter Evans at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires