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LONDON (Reuters) - Tesco, the world's No.3 retailer, slashed expansion plans for its main British chain and said it would spend over 1 billion pounds ($1.6 billion) on improving stores and online shopping as it battles to recover from a shock profit warning.
The group also said on Wednesday it would rein in store openings at its loss-making U.S. arm Fresh & Easy, pushing back the expected break-even point for that business.
But it rejected calls for a more radical shake-up, after some investors urged it to pull the plug on Fresh & Easy, as well as its banking business, which has been hit by delays.
"I'm announcing today our 1 billion pounds plan to put the heart and soul back into Tesco," Chief Executive Phil Clarke told reporters after the group reported a small full-year profit rise that met market expectations.
"The plan isn't radical, isn't a radical change of direction, but it's a radical change of pace," he said.
Once one of the most consistent British companies in terms of earnings growth, Tesco stunned investors in January with its first profit warning in over 20 years, saying it needed to invest heavily to stem a steady decline in UK market share.
Many European retailers have been struggling as shoppers' disposable incomes are squeezed by higher prices, muted wages growth and government austerity measures.
Tesco, which accounts for about one in every 10 pounds spent in British shops and makes over 70 percent of its trading profit there, has suffered more than rivals like Sainsbury and Asda in part because it sells more discretionary goods like homewares, where shoppers have been cutting back most.
Clarke, a Tesco lifer who as a youth stacked shelves at his local store, took over from long-serving predecessor Terry Leahy in March 2011. He said the UK business needed more staff, smarter stores, lower prices and better products after becoming too focused on cutting costs and boosting profit margins.
"We fully recognise that we need to raise our game in the UK," he said.
Tesco will focus on sprucing up its existing shops as well as growth areas like internet shopping, "click & collect" pickups and convenience stores. Its banking business will also offer mortgages for the first time this year.
But it will also rein in its expansion, particularly of large out-of-town hypermarkets, opening 38 percent less selling space in Britain in its 2012-3 financial year than in 2011-2.
That would help to reduce capital spending for the group as a whole to 3.3 billion pounds from 3.8 billion in 2011-2.
Tesco shares, down 22 percent over the past six months, were up 0.1 percent to 329 pence by 1225 GMT, slightly outperforming the European retail sector, as analysts expressed relief that there had been no second profit warning.
The firm said it was comfortable with latest market consensus profit forecasts for 2012/13.
Some analysts said Tesco should have been bolder and a recovery could take years given a weak starting point, a tough economic backdrop and modest results from early store revamps.
"There is a lot of things listed 'to do' and doing them will by definition take time," said Shore Capital analyst Clive Black, who thought the group should stop all new store openings in Britain for three years while it sorts out its problems.
Jon Copestake, retail analyst at the Economist Intelligence Unit, questioned the level of investment in Britain.
"Global competitors have recently set their sights on new markets in Asia, Sub-Saharan Africa and Latin America, with a special focus on easing restrictions in India. Some may ask whether 1 billion pounds might have gone further in these markets," he said.
Clarke said the 1 billion pounds included around 400 million in capital spending and part of the 500-million-pound price cutting campaign launched last September -- the "big price drop" dubbed the "big price flop" by analysts.
The group will revamp 430 British stores, or 25 percent of its UK selling space this year, improving their look and feel with warmer colours, better lighting and signage, Clarke said.
Since the January profit warning, Clarke has announced plans to hire 20,000 more staff in Britain and relaunched the firm's budget food range. In March he also jettisoned the head of the UK business to take control of the turnaround plan himself.
Analysts said he faces an uphill struggle, pointing to the repeated failures by France's Carrefour - which is Europe's biggest retailer and even more exposed to out-of-town hypermarkets - to turn itself around.
Espirito Santo analysts described as "underwhelming" results from Tesco's revamped trial stores showing a 1.2 percent improvement in like-for-like sales versus a control group.
Others said Clarke was right not to be radical and that Tesco needed to execute better.
"It is not about Tesco having a magic new format, it is about doing 1,000 things, 1 percent better," said Panmure Gordon analyst Philip Dorgan.
Tesco, with over 6,000 stores in 14 countries, said profit before tax and one-off items rose 1.6 percent to 3.9 billion pounds in the year to February 25, 2012, in line with forecasts.
Trading profit in Britain fell 1 percent, with sales at stores open over a year down 1.6 percent in the final quarter, compared with a fall of 2.3 percent over Christmas.
Losses at Fresh & Easy narrowed for the first time since its launch in 2007 by 18 percent to 153 million pounds, but Tesco said it now did not expect the chain to break even until its 2013-4 fiscal year, compared with the end of 2012-3 previously.
($1 = 0.6279 British pounds)
Editing by Mark Potter