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Tesco Holiday Sales Fall Short of Target

Tesco, Britain's biggest retailer, reported slowing sales in its core UK market on Tuesday, missing analyst expectations and sending its shares lower, but showed strong growth internationally.

The worse-than-expected update is the latest in a series from British retailers pointing to a slowdown in consumer spending amid rising energy costs and weaker house markets, and the company called for lower UK interest rates.

Underlying sales at Tesco's UK stores open more than a year rose 3.1 percent in the six weeks to Jan. 5, slowing from 4.1 percent growth in the third quarter and below forecasts of around 4 percent.

Tesco shares lost more than 4 percent of their value in early trading, underperforming a 1.1 percent fall in the DJ Stoxx index of European retailers.

Numis analyst Jose Marco Tobares, who has a "buy" rating on Tesco stock, said the company's UK sales had fallen short of his forecasts but that was offset by 29.6 percent growth in its international business and good progress in non-food sales.

Finance and Strategy Director Andrew Higginson said Tesco had enjoyed a good Christmas, but called on the Bank of England to lower interest rates to help shore up the confidence of a "more cautious" British consumer.

"The Bank of England does need to move quickly," Higginson said in an interview.

The call for a rate cut echoes British largest clothing retailer, Marks and Spencer, last week, whose chief executive, Stuart Rose, reported falling like-for-like sales over Christmas, disappointing investors.

But while Rose said a downturn could drag until spring 2006, Tesco's Higginson said the outlook was impossible to call.

"I'd be worried about making a forecast at the moment. At this kind of level we can make good profits and we have to hope it continues," Higginson said.

Morrisons Applauded

Among Britain's top four food retailers, Higginson said he considered Tesco, and its nearest rivals Asda and J. Sainsbury to have performed about the same.

WM Morrison Supermarkets, which updates the market on trading on Jan. 22, "had a better Christmas than everyone, well done to them," Higginson added.

Sainsbury last week said its sales open at least a year rose 3.7 percent, excluding fuel, in the third quarter to Dec. 29, slightly outpacing Tesco's six-week update.

Adding to Tesco's discomfort, Sainsbury's shares rose 3.8 percent on Tuesday after Goldman Sachs upgraded its stock to "buy" from "neutral" and added it to its conviction list.

Analysts had on average expected Tesco to report UK like-for-like sales, excluding fuel, up 4.0 percent, a Reuters survey of eight brokerages showed. Forecasts ranged from 3.5 percent to 4.5 percent.

Group sales at the world's third largest supermarket group after Wal-Mart Stores and Carrefour rose 12.8 percent in the period.

International sales grew 26.9 percent from the 12 countries outside Britain where Tesco operates, broadly in line with analyst forecasts. Sales in Central Europe showed some of the strongest growth, rising almost 30 percent.

Higginson said customer response to Tesco's newest expansion in the United States, where it has 30 stores operating under the Fresh & Easy brand, was "very encouraging."

He was non-committal about news Wal-Mart is opening convenience stores in Arizona in direct competition with the Fresh & Easy format. "As they say, imitation is the sincerest form of flattery," Higginson said.