LONDON (Reuters) - Britain's Tesco Plc (TSCO.L) said its 1 billion pounds ($1.6 billion) turnaround plan for its home market was starting to work as it posted its highest sales growth in three years over the crucial Christmas period.
Tesco, the world's third-largest retailer, beat forecasts for underlying sales growth, regaining an edge after a dismal Christmas in 2011 prompted the group's first profit warning in 20 years and a strategic rethink.
Shares in Tesco - which also announced the appointment of Chris Bush as managing director to run its key British business - rose more than 2 percent to hit their highest in a year.
Sales at British stores open more than a year, excluding fuel and VAT sales tax, grew 1.8 percent in the six weeks to January 5, part of Tesco's fiscal fourth quarter, compared with analysts' forecasts in a range of up 0.5 to 1.5 percent and with a third-quarter fall of 0.6 percent.
"Whilst our seasonal performance is encouraging, there is a lot more to do," said group CEO Philip Clarke.
The outcome was driven by a stronger food performance and an 18 percent rise in online food sales, though general merchandise - including electricals - was still a drag on growth.
The company did, however, benefit from easy comparative numbers, as in the same six week period of Tesco's last financial year like-for-like sales had fallen 2.3 percent.
"They've really done well in the UK, showing the strongest evidence to date that they're regrouping," said analyst Clive Black at brokerage Shore Capital. "The momentum on Tesco is now more up than down."
Tesco is battling to regain momentum against a weak UK economy, with consumers fretting over job security and a squeeze on incomes. The firm has suffered more than rivals, in part because it sells more discretionary non-food goods on which shoppers have been cutting back most.
In April Clarke launched a strategy to revive UK sales, investing in more staff, revamped food ranges, refined marketing and smartened stores that give more space to food.
Yet some shareholders are still to be convinced of its effectiveness.
"The expression ‘one swallow doesn't make a summer' comes to mind," said one top 20 investor in Tesco. "The comparisons are flattering ... and there are still plenty of structural issues to resolve.
"Have you been in a Tesco store recently and noticed a difference in the offering? Because I haven't."
Bush, a Tesco lifer and currently chief operating officer in Britain, will step up to run the British business. Clarke had taken direct control of the UK business in March after ousting Richard Brasher.
Clarke said he would stay close to the British business but his focus would now be on the group's "vision and strategy".
Shares in Tesco, down 10 percent over the last year, were up 8.4 pence at 358p by 0900 GMT, valuing the business at about 29 billion pounds.
Though consumer spending generates about two-thirds of Britain's gross domestic product, many retailers are struggling. On Wednesday Marks & Spencer (MKS.L), Britain's biggest clothing retailer, posted a disappointing trading update, while camera specialist Jessops entered administration, threatening 2,000 jobs.
With consumer price inflation running at 2.7 percent, Tesco is still seeing negative real growth in the UK, as are its so-called big four grocery rivals - Wal-Mart's (WMT.N) Asda, J Sainsbury (SBRY.L) and Wm Morrison (MRW.L).
On Wednesday Sainsbury posted a 0.9 percent rise in revenue, excluding fuel and new stores, for the 14 weeks to January 5, while on Monday Morrison reported a 2.5 percent like-for-like fall, excluding fuel and VAT sales tax, for the six weeks to December 30.
Asda is not due to report until February.
Industry data on Tuesday showed Sainsbury posted the highest sales growth of the big four in the 12 weeks to December 23 and was the only one to raise its market share.
That data also showed Tesco's sales growth was the second highest among the big four and also highlighted much stronger growth at the discount end of the market, led by Aldi and Lidl, and, at the premium end, at John Lewis's JLP.UL Waitrose.
Tesco, which trails Carrefour (CARR.PA) and Wal-Mart by sales, said group sales rose 3.9 percent excluding petrol.
While the firm may be making progress in the UK it still has problems overseas. Though the group has flagged an exit from the United States, in South Korea - its biggest overseas market - legislation allowing local governments to impose shorter trading hours is hurting sales. ($1 = 0.6247 British pounds)
Additional reporting by Kate Holton and Sinead Cruise; Editing by David Holmes