UPDATE 1-Pressure mounts at Tesco as British sales slide worsens

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By James Davey

LONDON, June 4 (Reuters) - Tesco, Britain's biggestretailer, posted the worst quarterly drop in underlying sales inits key home market since Chief Executive Phil Clarke took thehelm in 2011, raising further questions over his tradingstrategy.

Clarke is two years into a multi-billion pounds turnaroundplan for its British business which contributes two-thirds ofsales and profit for the group, the world's third-largestretailer after Wal-Mart and Carrefour.

Tesco said on Wednesday sales at UK stores open over a year,excluding fuel and VAT sales tax, fell 3.8 percent in its fiscalfirst quarter, hurt by price cuts and a weak food market, andthat it expected the difficult times to continue.

That was however better than some analysts feared after therelease of weak market share data on Tuesday, and the companysaid it was pleased with the early results from its turnaroundprogramme.

Analysts had forecast a decline of 3.5-4.1 percent, after afall of 3 percent in the fourth quarter of Tesco's 2013-14 year.

Analysts also estimate that the result is the weakestperformance for over a decade for the British market leader,although Tesco does not give a breakdown of quarterly resultsgoing back that far.

"We are pleased by the early response to our acceleratedefforts to deliver the most compelling offer for customers,"said the firm.

"We expect this acceleration to continue to impact ourheadline performance throughout the coming quarters and fortrading conditions to remain challenging for the UK grocerymarket as a whole."

Tesco is battling a British grocery market growing at itslowest rate for 11 years as stagnant wages keep consumerspending in check.

In common with Britain's three other big grocers, Wal-Mart's Asda, Sainsbury's and Morrisons, it isalso being squeezed between hard discounters Aldi and Lidl and Waitrose and Marks & Spencer at the premium end.

Asda and Morrisons have pledged to cut prices, whileSainsbury's has vowed to remain competitive, raising analysts'concerns about a possible price war hitting earnings across theindustry.

"I'm not making any promises about sales improvement in thenext few quarters," Clarke told reporters.

The result at Tesco is two straight years of profit declineand forecasts for a third in the 2014-15 year after Clarkeguided in April that same store sales would be negative for sometime.

Vowing to win back shoppers with millions of pounds of pricecuts and by accelerating the pace of change at larger stores, ithas spent billions on store refits, staff, product ranges andonline services, but it has so far failed to deliver animprovement in underlying sales.

The turnaround programme has also resulted in the groupdropping a profit margin target, which was the highest in theindustry, as price cuts hit sales going through the till if theyare not offset by volume gains.

International sales showed some improvement in the firstquarter.

"The key concern now is that if UK like-for-like salesgrowth rates continue at this level then management might needto consider cutting capital investment again," analysts atCantor said.

"Tesco management should provide more evidence that thecurrent strategy is working otherwise we could expect UK marginsto fall below the current 4.5 percent (down 50bps) this year." (Reporting by James Davey; editing by Kate Holton)