Tesco profits tumble by over 25% but sales are up as the supermarket giant works on recovery

The UK's biggest supermarket Tesco said half-year profits dropped by more than a quarter, but still managed to rack up a third quarter in a row of sales growth as its turnaround gains traction.

The group posted a 28.3% fall in bottom-line pre-tax profits to £71m ($90m, €63m) for the six months to August 26 after being hit by the sector's fierce price war.

But it added like-for-like sales, a key measure of growth in the industry, surged by 0.9% in the second quarter.

So-called Big Four supermarkets – Tesco, Sainsbury's, Asda and Morrisons – are locked in an intense battle for market share against discounters such as Aldi and Lidl.

Chief executive Dave Lewis outlined plans to slash costs by £1.5bn to help get profits back on track.

He said the group's recovery was gaining pace, but cautioned that the market remains "challenging and uncertain".

Tesco's second-quarter like-for-like sales growth across the UK and Ireland marks a sharp increase on the 0.3% rise seen in the previous three months and comes after a major investment in price cuts.

Lewis said he thought that grocery prices would continue to fall as a result of the competition among his rivals.

He said: "As we look at the market and as we predict forward we still see some deflation in the market place."

"That's a reality we faced into the last two years and we think we will continue to face into, certainly into the short term."

However, Tesco's shares surged by as much as 9% in early trading after the group's better-than-expected sales performance.

Retail analysts at Bernstein said it was a "fantastic set of results for Tesco, delivering on all aspects of the UK recovery".

Accounting Scandal

The figures mark a turnaround after a torrid couple of years, when it posted the biggest loss in its history and was hit by a £326m accounting scandal.

Last month, three former executives were charged with fraud in relation to the scandal, which they deny.

Separately, the company is also facing legal action from a group of investors who claim to have lost £150m due to the supermarket's 2014 accounting irregularities scandal.

Tesco added it was yet to see an impact from Brexit or the falling pound on the business or costs, but revealed the fallout from the referendum result has sent its pension scheme funding gap ballooning by £3.2bn to £5.9bn.