Tesco said its turnaround efforts were paying off with improved trading in the UK, but revealed the impact of tough overseas markets and the costs of its overhaul as group profits slumped by a quarter.
The supermarket giant revealed first half group pre-tax profits of £1.39 billion, down 24.5% year-on-year with currency effects stripped out after being hit by restructuring costs and steep profit falls across Europe and Asia.
But trading profits in its UK business rose 1.5% to £1.13 billion, with like-for-like sales excluding petrol remaining flat in its second quarter after falling 1% in the previous three months.
Rival Sainsbury's continued to pile on the pressure as it reported like-for-like sales excluding petrol were up 2% in its second quarter.
Tesco also confirmed a deal with China's largest retailer China Resources Enterprise (CRE) to merge their operations in the country, creating a business with more than 3,100 stores and combined sales of close to £10 billion.
It marks a major shift in strategy for the group, bringing to an end its independent business in one of the world's fastest growing retail markets, and comes after it recently offloaded its loss-making US Fresh & Easy chain as part of a strategy to focus efforts on its UK turnaround.
Philip Clarke, chief executive of Tesco, said: "Despite continuing challenges, we have made further progress on our strategic priorities.
"Our performance in the UK has strengthened through the half, particularly in our food business, as we have continued our work to Build a Better Tesco," he added.
The group suffered a 71% tumble in European trading profits to £55 million in the first half to August 24 and admitted the hit was worse than expected after conditions worsened in countries such as Ireland, Turkey and Poland.
Profits also fell sharply across Asia, down 12.4% to £314 million, excluding China.
Tesco admitted the overseas woes would offset some of the benefit of its UK profits improvement over the full-year.
Mr Clarke said he remained committed to Europe, but stressed the region accounted for less than 15% of group sales.