Retailer Woolworths yesterday reported a recent pick-up in sales but warned it faced a battle to lure in customers over the key Christmas period.

The group said same-store sales at its core chain fell by

1.7 per cent in the eight weeks since its last trading update, compared with a previous 4.4 per cent decline.

It came as it revealed underlying losses widened by £3 million to £35.9 million in the first half of its financial year as tough trading conditions continued to take their toll on the business.

Group sales from continuing operations were down 2.9 per cent to £1.04 billion.

Chief executive Trevor Bish-Jones said he expected the retail environment to remain challenging.

The group, which normally makes a loss over the quieter first half of its financial year, said measures such as improving the price of its products would boost sales and profitability over the key Christmas period.

The group has more than 800 stores, including a handful of out-of-town outlets.

Mr Bish-Jones said price cuts would help drive business over Christmas, with some of the prices set to be "pretty aggressive".

He said: "Last year we would have had a traditional product like a foot spa selling at £19.99. This year we've got it down to £9.99." Instead of using "three for two" offers, which were losing strength as a promotional mechanism, Woolworths will rely more on price entry points such as £2.99, £4.99 and £7.99.

The group plans to lower its costs by reducing the amount of packaging used on products, allowing it to fit more into each delivery. Woolworths has also deferred a decision on pay increases for its staff until after Christmas.

During the six months to July 30, toys and electrical products delivered the strongest performance, with weaker sales in entertainment. Key toys for the Christmas period would include those linked to films such as Star Wars, Batman and Charlie and the Chocolate Factory.

A store refit programme was a factor behind the improvement in like-for-like sales, while a new system allowing customers to order over the internet inside stores boosted trading.

The company announced a cost-cutting drive at the beginning of the current financial year, encompassing a recruitment freeze and headoffice job cuts, reductions in marketing and a renegotiation of support-service contracts.

Some £25 million of additional cost savings over and above the £10 million made in the first half would be achieved through smarter stock control, improvements in staff management and lower distribution cost.