TESCO profits tumbled by around a fifth after coronavirus costs of almost £900 million offset surging sales.

The supermarket giant said pre-tax profits slid to £825m for the 12 months to February, compared with £1.03 billion the previous year.

It said profits were weighed down by £892m in Covid-related costs and the company’s decision to hand £585m in business rates relief back to the Government.

However, its role during the pandemic helped “recast Tesco’s reputation in the eyes of the public”, according to one analyst.

The bumper bill of pandemic costs was particularly driven by hiring staff to cover workers impacted by Covid-19 and investment in safety in stores.

Tesco hired almost 50,000 temporary workers during the pandemic, about 20,000 of whom have joined the retailer permanently.

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It had benefitted from a jump in demand for groceries during the pandemic, with more meals eaten at home amid restrictions on the hospitality sector and changes to working habits.

Group sales excluding fuel increased by seven per cent to £53.4bn for the year, buoyed by soaring online sales.

Online sales jumped by 77% to £6.3bn in the UK as the company doubled delivery capacity to meet rising demand from housebound customers.

The group said it has pumped significant investment into keeping its prices low in a bid to match its discount rivals, with Tesco launching its Aldi Price Match campaign last year.

It said it has made progress in the “value perception” among customers as a result.

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Ken Murphy, Tesco chief executive said the firm has shown “incredible strength and agility” throughout the pandemic.

“By putting our customers and colleagues first, we have built a stronger business,” he said. “While the pandemic is not yet over, we’re well-placed to build on the momentum in our business.

“We have strengthened our brand, increased customer satisfaction and improved value perception.”

Ross Hindle, analyst at Third Bridge, said: “The last 12 months have recast Tesco’s reputation in the eyes of the public.

“The supermarket giant has gone from an ageing incumbent at once threatened by both German discounters and high-tech hot-shots to a more purposeful institution closer to our hearts.”

Donald Brown, senior investment manager at Brewin Dolphin, said: “Tesco’s results reflect the sometimes tricky position that supermarkets found themselves in over the last year.

“Although they have largely been able to trade through the last 12 months, this has come with significant extra costs.

“The dividend remaining protected, albeit unchanged from last year, is a positive sign and suggests management are relatively confident in the medium-term outlook.”

Freetrade analyst David Kimberley said that “after a decade of poor performances, most Tesco investors are probably hoping 2021 can be the start of a new beginning”.

“Looking at the bigger picture, the sale of its Asian business and the special dividend payout are positive signs that Tesco is moving away from its prior adventurism and focusing instead on improving margins in its core business,” he said. “UK supermarkets have long been under pressure from the discounters, but the success of the price matching scheme may mean the tables have turned and it’s now Aldi and Lidl that are feeling the heat.”

Meanwhile, Edinburgh-based Tesco Bank said it has “yet to see significant defaults in its lending portfolio” as it reported a £154.9m loss before tax from continuing operations. It said: “We anticipate a return to profitability in Tesco Bank in the 2021/22 financial year.” Shares in Tesco closed down 2%, or 4.7p, at 227.4p.