Tesco at record £2.8bn but feels the pressure

Profits for last year rose 5.7% to a record £2.8 billion, or £7.7 million a day, after sales jumped 11.1% to £51.77 billion.

But it warned of "challenging market conditions" in the UK as rivals such as Sainsbury, Morrisons and Asda upped their games and consumers reined in spending.

"It is getting harder for Tesco to maintain the UK growth it has enjoyed until recently," said Nick Bubb of Pali International.

Goldman Sachs last month cut its rating on Tesco to "sell" on concern that higher food prices and slowing consumer spending will hurt earnings.

Tesco chief executive Sir Terry Leahy denied the firm was running out of steam and remained bullish about its prospects.

"There has been strong sales growth of over 11%," he said. "It must be one of the fastest rates of growth of any retailer in the world. In the UK there is solid growth. We are in the pack in terms of the competition and in the last few weeks we have been ahead of the pack."

Underlying profits rose 11.8% to £2.85 billion in the year to 23 February. It was in line with expectations in the City and shares in Tesco rose 11¾p to 408¾p.

Like-for-like sales in the UK rose 3.9% last year, although excluding petrol growth eased to 3.5%.

In the past five weeks sales growth excluding petrol "was over 4%", according to the firm, as it showed signs of getting back on track.

It complained of an "unusual" trading pattern last year because of the wet summer and "a combination of recovering competitors and more subdued consumer demand in some non-food product categories", which hit sales in the second half. Although demand for food remains strong, other ranges such as clothes and television have come under pressure.

It maintained its profits through "good expense control" as it felt the squeeze from the soaring cost of raw materials such as fuel and the price of wheat, rice and other basic food as it continued to cut prices in a bid to attract customers. Around £1 in every £8 spent in Britain is at Tesco. It has embarked on a major price war with rival supermarkets as the battle for customers heats up during the economic slowdown. It has cut the price of 7500 products this year.

Sir Terry said: "I wouldn't say we are struggling. We are coping well. We are responding well in a difficult trading climate. Customers are feeling a bit of pressure and are looking to spend less, so they come to Tesco."

Sir Terry defended expansion plans in the United States, where the Fresh & Easy format has been criticised in some quarters. The stores were launched with great fanfare in November but openings were put on hold last month.

Analysts including Mike Dennis of US broker Piper Jaffray reckon business is slow and the project could cost Tesco millions.

But Sir Terry said: "I am delighted and I'm very proud of what I see there. The customers love it, they really do get it. They see it as different from other stores and representing outstanding value."