Tesco shows signs of UK recovery

Price cuts and better service helped Tesco win back shoppers in its latest quarter, Britain's biggest retailer said on Friday, suggesting new boss Dave Lewis's turnaround plan is starting to have an impact.

Tesco has had a horrendous 18 months, with competition from fast-growing discounters Aldi and Lidl, compounded by an accounting scandal, driving it to a record annual loss.

But former Unilever executive Lewis has cut prices on popular grocery brands, improved product availability and put more staff in stores.

Tesco said sales at British shops open for more than a year fell 1.3 percent in the 13 weeks to May 30, its fiscal first quarter, partly reflecting a drop in food prices across the industry.

But that was better than analysts' forecasts for a fall of 1.6-3.0 percent, an improvement on the previous quarter, and also better than recent figures from major rivals Asda, Sainsbury's and Morrisons. Tesco also said 180,000 more customers shopped at its UK stores in the quarter, with the volume of goods sold up 1.4 percent on a like-for-like basis and transactions up 1.3 percent.

"Stemming the defection of consumers is the first, and arguably the most important, battle to be won," said Neil Saunders, managing director of retail researchers Conlumino.

Tesco's shares, down 21 percent over the last year, rose as much as 4.4 percent to a six-week high of 227.35 pence, as investors welcomed the improvements.

"Lewis and (finance chief) Alan Stewart have the correct strategy in place and are managing the company very well. Fixing the UK business is at the heart of their strategy," Chris Watt, fund manager of Jupiter Growth and Income Fund, one of Tesco's top 45 shareholders, told Reuters.

However, others cautioned Tesco faced a battle to continue its recovery in the teeth of a brutal industry price war.

"The price driven competition we are seeing across UK food retailing has made a tough business tougher," said Richard Marwood, senior investment manager at AXA Investment Managers, one of Tesco's 30 largest shareholders.