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Tesco chief executive Sir Terry Leahy today said he had witnessed "improving consumer confidence and encouraging trends" across the UK as the supermarket giant gears up for one of the most competitive Christmases in living memory.
But sales growth in the 13 weeks to last Friday came in at 2.8%, stripping out new store openings, which was down on the second quarter's 3.1% growth and slightly below City estimates of 3%.
"We are weathering this storm particularly well," said finance director Laurie McIlwee. "It is important to realise that we achieved 2.8% growth ina quarter when there was absolutely no inflation in our market."
The City's immediate reaction was one of disappointment and Tesco's shares fell 10.5p to 4261.4p. It had been hoped Tesco would show stronger signs of pushing ahead of its rivals.
Richard Hunter, Head of UK equities at Hargreaves Lansdown stockbrokers, said: "There is a tinge of disappointment in this update, set against the high expectations which Tesco attracts."
McIlwee warned that Chancellor Alistair Darling should not be tempted in his pre-Budget report tomorrow to put VAT above 17.5% when the tax's temporary cut to 15% comes to an end next month.
McIlwee said: "If VAT goes above [17.5%] it could be more negative. Just as consumers are getting more confident, to start indirectly taxing people will be a strain on their budgets."
Toys, electrical goods, clothes and items such as DVDs and CDs led the sales growth in non-food aisles while the online service Tesco Direct also delivered another strong quarter.
One of the encouraging trends was the flattening out of bad debts among customers of Tesco Bank which contributed 1.5% to growth.
In the US Fresh & Easy's revamp in September helped produce a 37% rise in actual sales. Total international sales improved on the second quarter.
Tesco is pushing hard to take every hard-earned pound it can.
Last week it sent out £67 million worth of Club Card points early to encourage custom and this week it launched price cuts across 200 of its "Finest" range including panettones, cranachan cheesecakes and strawberry and champagne panna cottas, backed by a TV advertising campaign fronted by Fay Ripley of Cold Feet and The Full Monty star Mark Addy.
McIlwee said that even before this the range had returned to strong growth.
"People are eating at home more than going out but are trading up by buying higher-quality foods," he said.
