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Tesco (TSCO) has increased sales in the first half 3.3% to £24.4bn, with profit expectations for the year on track, as turnaround plans put in place two years ago by CEO Dave Lewis begin to pay dividends.

Like-for-like sales in the UK in the 26 weeks to 27 August were up 0.6% as range resets, investment in price and new initiatives such as Farm Brands won back customers.

The supermarket has now recorded three quarters of like-for-like growth in a row. UK volumes also rose 2.1% in the period, with transactions up 1.6%.

Lewis is set to lay out further plans later this morning for the next stage of Tesco’s recovery, with the ambition of improving group operating margin to between 3.5% and 4% by the 2019/20 financial year.

Tesco will cut costs by a further £1.5bn over the next three years to reinvest in price, offset expected inflationary pressures and continue to rebuild profitability. The business also expects total capital expenditure to average £1.4bn a year as it puts the plan into action.

“Whilst the market is uncertain, we have made significant progress against the priorities we set out two years ago, stabilising the business and positioning us well for the future,” he said.

“Today, we are sharing the plans we have in place to become even more competitive for our customers, even simpler for colleagues and an even better partner for our suppliers, whilst creating long-term, sustainable value for our shareholders.”

Operating profits before exceptional costs jumped 60.2% to £596m, but after charges of £81m for restructuring and redundancy costs and relocating the head office the figure came down to £515m – an increase of 38.4% from a year ago. However, pre-tax profits slumped more tnan 28% on a year ago to £71m.

Tesco added it was on track to hit its operating profits target of £1.2bn for the full year.

“We have made further strong progress in the first half, with positive like-for-like sales growth across all parts of the group as we re-invest in our customer offer whilst rebuilding profitability in a sustainable way,” Lewis added.

“The entire Tesco team is focused on serving shoppers a little better every day. We are more competitive across our offer. Prices are more than 6% lower than two years ago, availability and service have never been better and our range is more compelling. Our new fresh food brands are performing ahead of expectations, improving our value proposition and further removing reasons for customers to shop elsewhere.”

Net debt was reduced by a further £800m since the year end and now totals £4.4bn. Tesco’s pension deficit increased £3.2bn to £5.9bn as a result of lower bond yields. The supermarket said there was long-term pension deficit funding agreement with a trustee in place.

Morning update

The City was impressed with the results and confident noise coming from the interim statement, in particular that Dave Lewis thinks he can deliver a 3.5%-4% group operating margin by 2019/20. Shares have surged 7% to a year-to-date high of 201.9p as markets opened this morning.

Morrisons and Sainsbury’s also benefitted from renewed confidence in the industry, with shares up 1.5% to 223.9p and 1% to 252.7p respectively. The gains for the three listed grocers haven’t been enough to keep the momentum in the FTSE 100 going (see below) as the index slipped 0.2% to 7,055.80 points.

Food price deflation has accelerated to a new record low, falling 1.3% in September from 1.1% in August. The latest BRC – Nielsen shop price index revealed overall shop prices reported deflation of 1.8% in September from the 2% decline in August. Non-food deflation decelerated to 2.1% in September, from 2.5% a month earlier.

“There’s been little change in the ongoing trend of price movements this month with shoppers finding their purchases 1.8% cheaper than at the same time last year, only marginally different from the 2% in August,” British Retail Consortium CEO Helen Dickinson said.

“The slight slowdown in deflation has been driven largely by non-food where shop prices fell by 2.5% in August compared to a fall of 2.1% in September. Food prices fell by 1.3%. As well as being the highest year-on-year fall we have ever recorded in food, it is only the second time since our shop price index began that food prices have fallen by more than 1%.”

Mike Watkins, head of retailer and business insight at Nielsen, added: “With a new round price cuts by supermarkets in September and fresh foods also promoted to encourage visits, this has helped maintain deflation in shop prices. However, the warm and late summer weather was a challenge for many in the non-food channel so we may well see further price discounts as we move into October.”

Yesterday in the City

Greggs (GRG) had a good day as it reported its third quarter sales rose 5.6% as its healthier range and breakfasts continued to be a hit with customers. The share price rose 1.6% to 1,063p.

Tesco continued its rise, with the stock up 2.2% to 189.4p ahead of this morning’s half-year results. Sainsbury’s (SBRY) and Morrisons (MRW) were also lifted 2.7% to 251.6p and 0.6% to 220.9p.

London’s blue-chip index also continued to rise above 7,000 points, up another 1.3% to 7,074.34 points. The levels not seen since 2015 were driven by the pound’s slump against the dollar. The FTSE 250 was also up 0.9% to 18,342.07 points.

Booker (BOK), Cranswick (CWK) and McColl’s (MCLS) all rose on a general positive day for the industry, up 3.3% to 187.1p, 3% to 2,441p and 2.2% to 177p respectively.

Majestic wine (WINE) had another bad day, closing 3% down at 292.3p. McBride (MCB), Kerry Group (KYGA) and Greencore (GNC) also finished in the red.

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