Shares leap 10% as Tesco keeps £3bn profit in its sights

Although the supermarket giant managed only a small rise in sales in the last quarter, its profit forecasts remain intact as it braces for a severe recession.

Like-for-like sales were up just 2% in the three months to 22 November - on the face of it the worst performance by any of the big players.

It is facing stronger competition than ever from rivals such as Asda and Morrisons, both of which are nibbling away at Tesco's commanding 30% share of the market.

Asda sales rose 6.9% in the three months to September.

Chief executive Sir Terry Leahy said: "We are pleased with our progress but we are also realistic. The current economic climate and the strain this is putting on consumers everywhere is something that all businesses are feeling, including ours."

Tesco denies claims that customers are defecting at record rates, saying more people than ever are using its stores.

It argues that by predicting a recession was coming, and moving to discount goods early, it intentionally took a hit to sales growth.

"By giving customers more affordable choices, we have deflated our sales during the quarter by between two and three percentage points. As a result, over 300,000 more customers are shopping with us every week," Sir Terry said.

The shares boomed 28p to 316p as investors digested the numbers.

Nomura analyst Matthew Truman said: "This stock was priced for a profit warning and that has not materialised. What has is a robust, positive and clear message that the business is structurally and strategically well-positioned to cope with the consumer downturn."

Group sales are up 11.7%, a sign that future growth will increasingly come outside the UK. But Tesco has slowed the pace of US expansion, a move it today called "prudent, given the severity of the economic slowdown in some markets there".

Critics have been warning for months that the US adventure is in trouble. Tesco insists it is well on track.

The company is cutting back on expanding and sprucing up stores. Capital spending will come down from £4.5 billion this year to £4 billion next.

Analysts expect Tesco to make profit of £3 billion for the year to February 2009.