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Tesco sees tough trading environment ahead

British supermarket giant Tesco reported a dip in group sales compared to last year, highlighting the challenges it faces in the U.K. and Europe.

Tesco, the world's third-largest retailer in terms of revenue after Walmart and Carrefour, said sales had fallen to £70.9 billion ($118 billion) in the last year, from £72.4 billion in 2012/13 which is a 0.2 percent fall at constant exchange rates. Sales excluding petrol -- the benchmark in the retail trade -- were up 0.4 percent.

Read MoreUK supermarkets caught in dangerous middle ground

Group trading profit also shrunk with a figure of £3.315 billion compared to £3.453 billion last year. However, this figure did manage to meet analyst expectations in a Reuters poll who predicted a figure of 3.24 billion. Shares in the company surged over 4 percent at the session open on Wednesday, with other supermarkets also seeing a bounce, with traders citing very low expectations ahead of the earnings release.

A customer carries Tesco-branded shopping bags as she leaves one of the company's stores.
Simon Dawson | Bloomberg via Getty Images
A customer carries Tesco-branded shopping bags as she leaves one of the company's stores.

Tesco's Chief Executive, Philip Clarke, said the results reflected the challenges it faces in a trading environment which is changing more rapidly than ever before. "We are determined to lead the industry in this period of change," he said in the press release.

The company painted a cautious picture of the year ahead. It said that it expects the challenging consumer environment, competitive intensity, and the rapid pace of change in retailing to continue in 2014/15.

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It added that it is committed to increasing loyalty and improving sales which it hoped would lead to sustainable profits and returns over the medium term.

Wednesday's results are just the latest in a long line of disappointing figures for the supermarket which is still the biggest supermarket in the U.K. by sales. Tesco has been caught in a dangerous middle ground in recent years after stellar growth during the 1990s. The group has dialed back on its expansion overseas such as the U.S. and it has found market share eroded at both the high and low ends of the market. Budget grocers from Germany like Aldi and Lidl have hoovered up market share and Waitrose, meanwhile, has been busy enjoying success at the higher-end of the scale.

Earlier this month Chief Financial Officer Laurie McIlwee announced his resignation and the Financial Times reported Tuesday that a top 20 investor in the company, which it did not name, had called for Clarke's resignation. Clarke iterated at a conference call on Wednesday morning that he wouldn't be leaving the firm and would "see through" this tough trading period.

Tesco added on Wednesday that its board had approved a maintained final dividend of 10.13 pence per share, giving a full year dividend of 14.76 pence which would be paid on July 4.

It also announced that it was treating its current operations in China as discontinued and Wednesday's results included a charge of £540 million relating to a goodwill write-down in the country. But the grocer is not exiting the country completely and has recently agreed a partnership with China Resources Enterprise, which it hopes will give it a 20 percent ownership stake in the largest food retail business in China.

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