Tesco profit hit by weak sales in Europe and Asia (UPDATE 2)

Tesco, Britain's biggest retailer, undershot first-half profit forecasts on Wednesday after weak trading in central Europe and Asia took the shine off accelerating sales in its core UK business.

The company, which this year acquired wholesaler Booker, reported operating profit before one-off items of 933 million pounds ($1.21 billion), up 24 per cent but short of the 978 million pounds analysts had expected.

Shares in Tesco, up 12 per cent so far this year, fell 5.4 per cent in early trading to 222 pence.

Chief Executive Dave Lewis said the group had grown sales in its home market, boosted by Booker and strong summer trading, and said it was "firmly on track" to hit its medium-term ambitions.

UK like-for-like sales rose 2.5 per cent in the second quarter, up from 2.1 per cent in the first, but sales fell by 2 per cent in Europe and by 4.8 per cent in Asia.

"The step up in the second quarter is driven mainly by the UK & Republic of Ireland and delivers our eleventh consecutive quarter of growth," he said.

Lewis has been rebuilding Tesco since 2014 when an accounting scandal capped a dramatic downturn in trading.

He has lowered Tesco's prices versus all its major competitors, streamlined product ranges and improved their quality while raising store standards and transforming relationships with suppliers.

The company said it had relaunched 5,038 of 10,000 own-brand products and attracted more than 189,500 new customers.

Tesco is aiming to make cost savings of 1.5 billion pounds, generate 9 billion pounds of retail cash and earn between 3.5 and 4 pence of operating profit for every pound customers spend by the end of its 2019-20 financial year. It had a margin of 2.94 per cent in the first half.

Lewis said the challenging conditions in its two biggest markets in central Europe and Asia - Poland and Thailand - did not imperil its medium-term margin target. 

(With inputs from agencies.)