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Tesco Upbeat on Outlook After First-Half Slowdown

Tesco Chief Executive Terry Leahy is "upbeat" about the outlook for the world's third largest retailer in the second half after it reported a slowdown in growth in its core British market in the first six months.

Tesco shares rose 3.7% to 451.6 pence on the upbeat outlook, outperforming a 1.7% rise in the DJ Stoxx index of European retailers. The stock closed at 435.5p on Monday, valuing the company at around 34.2 billion pounds ($69.84 billion).

Tesco, Britain's biggest store owner, said on Tuesday the wettest summer on record at home caused sales excluding fuel at its UK stores open at least a year to rise 3.5% in the 26 weeks to Aug. 25. It was its slowest growth in Britain in years, although still exceeded analyst expectations.

But when the rain clouds cleared consumer spending at Tesco's 2,000 British stores -- which contribute some 80% of its profits -- rebounded in August with U.K. like-for-like sales excluding fuel rising 5%.

"I am generally upbeat about the business. We came out of the period after the bad weather very strongly," Leahy said in an interview with Reuters.

"It clearly looks now the next interest rate move will be down rather than up and could well be ahead of Christmas so there will be some relief for the consumers," he added.

Not Hit by Crisis

Tesco did not suffer because of the recent crisis in the financial markets, Financial Director Andrew Higginson told "Squawk Box Europe."

"We haven't seen a big impact," Higginson said, adding that he hoped the 50 stores Tesco plans to open in the U.S. starting in November will fare well despite the subprime mortgage problems there.

But he said he remained cautious when it came to discuss the outlook of the U.S. business: "It's an intensely competitive market," Higginson said.

Group underlying pre-tax profit rose to 1.317 billion pounds, up 14.3% from last year and in line with expectations.

"The profit performance from the UK has been marginally below our expectation, but this has been offset by an out performance from the group's international division," Numis analyst Jose Marco said.

Sales in the 12 countries where Tesco operates outside Britain rose 23% at constant exchange rates to 6.4 billion pounds, helped by a rapid rollout in China and Malaysia.

Fresh & Easy

Going into the second half, the focus is on Tesco's anticipated launch in the United States and further divestments from its multi-billion pound property portfolio.

Leahy said Tesco remained committed to releasing value from its property despite concerns about property values in Britain and would carry out another deal in the second half. There was an "appetite" for property of the quality owned by the retailer following the global credit crunch, he added.

Its Tesco Direct, online non-food sales, is expected to deliver sales of 150 million pounds this year from a standing start. Tesco.com food sales are up 35% in the first half, with profits up 62%.

Tesco's launch of convenience stores in the United States next month under the "Fresh & Easy Neighborhood Market" brand is the most anticipated event in world retail this year. Breakeven is expected by the end of the second year.

Seymour Pierce retail industry analyst Andrew Wade, who has a "buy" on the stock, said with the U.S. opening on the horizon "we now see catalysts for the share price to kick in."

Significant Business

Economists say the U.S. expansion will add significant business to Tesco in a few years.

"Tesco brings a very strong model, that worked in the UK and elsewhere internationally," Christopher Hogbin from Sanford C. Bernstein told "European Closing Bell."

He said there was still room for growth in the UK retailer's shares: "Tesco continues to seem cheap."

Wade also believes that Tesco, which trades on a price-to-earnings ratio of 17.5, falling to 15.5 next year, continues to offer value. The DJ Stoxx index of European retailers trades at 18 times this year and 16 times next.

Leahy said entering the world's biggest consumer market -- the home of the world's most successful retailer Wal-Mart – was a "once in a generation" opportunity for Tesco and it would be opening 50 stores in this financial year.

Tesco has already opened a distribution hub at its U.S. headquarters in California, a step it usually takes when it has opened 400 stores in a country. It is spending 250 million pounds on the U.S. roll out this year.

It proposed an interim dividend of 3.2 pence per share, up from 2.81p last year.

Analysts polled by Reuters forecast a 3% rise in Tesco's U.K. like-for-like sales excluding fuel, its slowest growth in its home market since before 2000.