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By Kathy Sandler
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- The U.K. and the global economy are in for a slow but steady recovery, Tesco PLC (TSCO.LN) chief executive Terry Leahy said Tuesday, adding that the world's third-largest retailer is well-placed for this and now catching up with domestic rivals and benefiting from growth in many international markets.
The company, which is the world's third-biggest retailer by sales behind Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA.FR), Tuesday reported a 8.6% rise in profit before tax and exceptional items - the key figure tracked by U.K. analysts and investors - to GBP1.57 billion for the six months ended Aug.29.
This was above market expectations of GBP1.48 billion, and compares to GPB1.45 billion over the same period a year earlier.
Leahy told Dow Jones Newswires Tuesday that the global economy had passed its low point and things were improving, but that the recovery would be slow and steady. Still, "this is fine for Tesco, which can do very well against that background," Leahy said.
Tesco's dominance has been chipped away by its U.K. grocery rivals Asda Group Ltd. (AGP.YY), J Sainsbury PLC (SBRY.LN) and William Morrison Supermarkets PLC (MRW.LN).
Some of its underperformance was also caused by Tesco introducing a discount range in the U.K. earlier this year to better lure the more frugal customers. While this had led to a slowdown in its like-for-like sales at the time, the retailer says it has now caught up with industry growth trends.
In the second quarter, sales from stores open a year rose 3.1% when value added sales tax and volatile petrol are excluded. This growth, and the pattern of trading seen so far in the second half "confirm that our growth rate has converged with the wider industry," the company said.
Still, the industry overall is having to deal with a decrease in food price inflation, which for the last year has helped food retailers increase prices and sales. Now, lower prices invariably mean lower sales growth, although Leahy believes a more neutral inflation environment is more representative of the market anyway.
"High inflation is damaging for the industry because it erodes consumer confidence in prices, low or no inflation is better," he said, adding that he doesn't believe inflation will fall below 0%.
Overall Shore Capital analyst Clive Black believes Tesco's first half performance was commendable given the challenges facing the company worldwide, and he expects trading environments in the countries where Tesco operates to improve over the next year.
Tesco operates around 4,300 stores in 14 markets, of which around 2,280 stores are in the U.K., according to its corporate Web site. The remainder are in Ireland, France, Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Japan, Malaysia, South Korea, Thailand and the U.S.
Leahy said Tesco's U.S. Fresh and Easy grocery store business, which focuses on Southern California and the Las Vegas and Phoenix metropolitan areas, is improving. Still, Tesco will wait for signs of economic recovery in the region before increasing the rate of store openings, which currently stands at about one store per week.
The U.S. business made a trading loss of GBP85 million in the first six months of the year. In the same period last year the company did not have any stores open and only reported startup losses.
The company reported first half revenue excluding value added tax up 9.3% to GBP27.8 billion, up from GBP25.64 billion a year earlier and below forecasts of GBP28.13 billion.
First-half net profit rose to GBP1.03 billion from GBP1.01 billion last year compared with Dow Jones consensus estimates of GBP1.04 billion.
Net debt in the first-half fell to GBP9.5 billion from GBP9.6 billion at end-Feb. The company said it's on track to hit its fiscal 2009/2010 net debt target of GBP8.5 billion on a stable sterling basis, with further reductions expected in fiscal years 2010/2011 and 2011/2012.
As a sign of confidence, Tesco increased its interim dividend to 3.89, ahead of expectations of 3.78 pence a share from 3.57 pence a year earlier.
At 0749 GMT, Tesco's shares were down 1.2% or 4 pence at 387 pence in a flat London market. The stock is down 4% from year-ago levels.
Company Web site: http://www.tesco.co.uk
-By Kathy Sandler, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com