Battering for Tesco shares as sales feel the pinch

Although Tesco's statement was relentlessly upbeat, and finance director Andrew Higginson claimed to be "thrilled" with the performance, investors disagreed.

The stock was the biggest faller in the FTSE 100 index yesterday after a scathing downgrade from Morgan Stanley, and it dipped another 12p to 408p on today's news.

Like-for-like sales in the six weeks to 5 January rose 3.1%, below analysts' forecasts and falling short of the 3.7% sales increase at rival J Sainsbury.

Tesco repeated its plea for an immediate cut in interest rates - perhaps a sign that it fears it is running out of steam. "From where we sit in the retail sector, rates are too high. They have squeezed consumers too much," said Higginson. "The Bank of England does need to move quickly."

Tesco takes one in every eight pounds spent by UK shoppers, putting it in a unique place to gauge the state of the economy.

The chain is increasingly looking overseas for expansion, however. Group sales were up 12.8% during the period, thanks to international sales rising 27%. Turkey was up 80% and Malaysia 60%.

It now has 30 Fresh & Easy convenience stores in America, a format that Wal-Mart is moving to copy. "Imitation is the sincerest form of flattery," said Higginson.

Tesco will not yet reveal how Fresh & Easy is performing, beyond stating that customer response has been "very encouraging".

In the UK, Tesco is coping with a slumping economy and resurgent competition. In October, chief executive Sir Terry Leahy admitted that "unseasonal summer weather and recovering competitors" were making life tough.

Asda, now owned by Wal-Mart, claims to have enjoyed its best Christmas ever and Morrisons is expected to have done well.

Morgan Stanley yesterday cut its price target for Tesco shares by a quarter to 375p - a call that seemed justified today. "Even great companies don't outperform every year," said the Morgan analysts.

Numis Securities offered a different view today, insisting the shares are a buy up to 570p, and saying Tesco's growth in the non-food sector would hurt rivals.

"Tesco is in a good position to continue to gain market share," said a Numis note. "The group continues to make good progress in non-food and with good market share growth in most categories. We believe this makes Tesco a more attractive place to be in the retail sector and has negative implications for non-food retailers such as Next and HMV."

Tesco is on course to make profits of £2.9 billion this year.

The most serious sign of a slowdown on the High Street came last week from Marks & Spencer, which admitted Christmas like-for-like sales, which strip out the effect of new store openings, fell 2.2%.

The supermarket sector remains under investigation by the Competition Commission, which suspects Tesco's market share of 30% cannot be good for the consumer.