Winning formula returns for resurgent Tesco

The UK's biggest grocer defied the recession and outperformed market expectations with a 4.9 per cent increase in UK like-for-like sales during the six weeks to January 9.

This was much better than analysts' forecasts of a three per cent increase and above the 2.8 per cent growth reported in the three months to November 28.

Tesco said its Finest range was a "real winner" with a 16 per cent jump in sales as customers splashed out on Christmas treats.

The group said sales of champagne were up 35 per cent on last year.

It also saw strong demand for discretionary non-food purchases such as electrical goods, toys and clothing – which grew at twice the rate of food sales.

Previously Tesco has lagged the sales growth seen at its arch rivals Leeds-based Asda, Sainsbury's and Bradford-based Morrisons due to its greater exposure to discretionary non-food goods and to shoppers switching to its cheaper discount range.

But industry data shows the gap has closed.

"We've not only converged with competitors, but we're at the front of the pack," said finance director Laurie McIlwee.

Tesco handed out around 100m in extra loyalty vouchers before Christmas and the group said around 40m of these were redeemed.

Mr McIlwee said the additional vouchers boosted its like-for-like sales figures by about 0.5 percentage points and ensured customers shopped with the supermarket.

He said the group is slowly reducing its promotional activity, but

there is still a discount-driven environment.

Tesco said consumers wanted to put aside the worries of the previous year and treat themselves over the festive break.

"There is an element of people being fed up of continuous bad news – they wanted to enjoy Christmas," he said.

Mr McIlwee praised staff for keeping stores open in spite of the recent heavy snow and said the transport problems had seen customers turn to online purchasing.

Internet sales grew nearly 20 per cent in the six weeks, with rises in food and other items.

But Tesco, the world's fourth-biggest retailer, joined its rivals in expressing concerns about the outlook for 2010.

Mr McIlwee said: "Unemployment is still high and of course we've still got all of the concerns about how a large Government debt is going to be paid off."

He warned that business could be negatively affected if austerity measures to deal with the state deficit are introduced too early.

Tesco said total UK sales, excluding fuel, outperformed the industry as a whole, increasing by eight per cent on last year.

Tesco, which runs over 2,300 stores in 14 countries, said group sales rose 7.5 per cent at constant currencies, helped by further signs of economic recovery in both Asia and Europe.

Last week Sainsbury's reported a 4.2 per cent rise in underlying sales for the 13 weeks to January 2.

Tesco said it plans to launch current accounts and mortgages within the next year.

Mr McIlwee said: "We will launch current accounts and mortgages by the end of 2010 or early 2011."

Tesco's shares closed the day up almost one per cent, a rise of 3.15p to 421p.

Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said Tesco seemed to have rediscovered its "winning formula".

"The Tesco juggernaut is firmly back on track," he said.

"The company has enjoyed formidable growth during the festive season and, with the exception of its fledgling US business, the numbers are strong across the board."

Analyst Sam Hart at Charles Stanley said: "We expect Tesco to continue to deliver high single/low double-digit growth in earnings and dividends for at least the next three years."

Debenhams to step up store refit

Department store group Debenhams said it was pleased with Christmas trading after profits improved for the second year in a row.

The chain said the 0.1 per cent improvement in like-for-like sales in the 18 weeks to January 2 was in line with forecasts, although growth was limited by the decision to move away from concessions into own-bought merchandise.

Debenhams said the strategy benefited margins, while profitability was also boosted by fewer price reductions than last year.

Debenhams said it would step up its store refit programme.

It put the programme on hold last year with 42 of its 144 department stores still awaiting refurbishment. It expects to complete four or five stores in the current financial year.

The company said its designer brands, which include ranges from Jeff Banks and John Rocha, remained popular despite the downturn.

The portfolio will be boosted in the coming weeks by the return of the Principles brand, which disappeared from the high street last year following the administration of parent company Mosaic Fashions.

Debenhams purchased the rights to the brand name.