Tesco is showing signs of life thanks to its £1bn turnaround plan - but at the cost of its first fall in group profits for almost 20 years.

Like-for-like sales in the UK, excluding VAT and petrol, grew 0.1% in the second quarter, reversing a decline of 1.5% in the first quarter of the year.

But Tesco suffered a 12% decline in group pre-tax profits to £1.7bn in the six months to August 25. That was due in part to the cost of its investment in stores, but also brutal economic conditions affecting its global empire.

Sales in Asia and Europe fell on a like-for-like basis in the second quarter, hit by issues including shopping hour restrictions in South Korea and the European debt crisis.

Chief executive Philip Clarke said he was “encouraged” by the rise in UK sales but warned: “There is much more to be done.”

“The external environment continues to present challenges all over the world,” Clarke said. “While our businesses in Asia and Europe have continued to do a great job for customers, our financial performance there reflects the tough economic backdrop and particularly the regulatory changes in South Korea.

“That we have gained or held market share in the majority of markets is a testimony to the skill of our teams across the group.”

Tesco’s embattled US chain, Fresh & Easy, achieved only a small reduction in its losses in the second quarter. It sustained losses of £74m over the period, despite Tesco slamming the brakes on its expansion plans in a bid to make existing stores profitable.

Clarke, who has said Tesco will pull out of the US if he cannot see a profitable future for the chain in the long term, said he was looking at “further steps to accelerate the pace of improvement”.

Back in the UK, Clarke predicted trading margins would be similar in the second half of the year and said Tesco was planning on the basis that the economy would remain “very challenging”.

Despite its £1bn store turnaround programme, Tesco has slashed its capital expenditure after declaring an end to the “space race” in its home market. Clarke said two main strands of its strategy were beginning to pay off.

“First, significantly reducing space growth in the UK and focusing on improving the performance of our existing stores; and second, investing in online to enable Tesco to take a leadership role in the digital revolution, playing our part in shaping the future of retailing.”

Online sales grew more than 11% in the first half, year on year.

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