SBRY Sainsbury (j) Plc

--Tesco beat analyst expectations for sales growth in its third-quarter and Christmas trading update, sending U.K. supermarket stocks higher.

--Tesco highlighted stronger growth in the late-Christmas period, suggesting shoppers spent more in December following poor November sales for British retailers.

--Recent industry figures suggest discount chains are continuing to build market share, while the heads of supermarket chains Sainsbury's and Morrisons have warned of Brexit's potential effect on the industry.

By Adam Clark

A late surge in Christmas sales meant the U.K.'s largest supermarkets avoided the worst of the crisis in the retail sector, but concerns over customers turning toward lower-cost rivals are intensifying as Brexit uncertainty weighs on economic confidence.

Tesco PLC (TSCO.LN), the U.K.'s largest supermarket chain, boosted investor confidence on Thursday by beating analyst expectations for both its third-quarter and Christmas sales. A 2.6% increase in like-for-like sales in the six weeks to Jan. 5 suggested customers returned to spending after reports of a weak November for British retailers. Chief Executive David Lewis told analysts that Tesco had achieved its highest rate of Christmas growth since 2009, without relying heavily on promotional activity.

The results sent Tesco's stock up about 2% toward the close of the session, among the best performers in the FTSE 100. It also boosted sentiment toward listed rivals J Sainsbury PLC (SBRY.LN) and Wm. Morrison Supermarkets PLC (MRW.LN) which disappointed investors in their own Christmas trading updates earlier in the week.

Sainsbury's, the second-largest U.K. grocer, was particularly hard hit on Wednesday when it reported a 1.1% drop in like-for-like sales, excluding fuel, for the 15 weeks to Jan. 5. The company said the figures were affected by the inclusion of November, when its decision to opt out of Black Friday promotions hit its general-merchandise business, including catalogue retailer Argos.

Sainsbury's Chief Executive Mike Coupe also worried investors when he said customers had gone for cheaper options during the quarter. Figures from consultancy Kantar earlier in the week showed German discount chains Lidl and Aldi took a record combined market share of 12.8% over the Christmas period.

Mr. Coupe warned that a hard Brexit in which the U.K. fails to secure a trade deal with the European Union before exiting the bloc would be a "significant operational challenge" for the retail industry.

Morrisons Chief Executive David Potts also highlighted hesitant consumer spending over the festive period and Brexit concerns.

"I think from the country's point of view, entering relatively unchartered territories with regard to the outcomes from Brexit, then it would be entirely natural for consumers to feel a bit more cautious," he said.

Despite such concerns, all three of the listed supermarkets have outperformed the FTSE 100 over the medium-term with the large-cap index having fallen 11% over the last year. Sainsbury's is up 8.4% over the same period, having gained on its prospective merger with Walmart Inc.'s (WMT) Asda, while Tesco is up 1.8%, and Morrisons is down 4.5%.

Write to Adam Clark at adam.clark@dowjones.com

(END) Dow Jones Newswires

January 10, 2019 11:39 ET (16:39 GMT)

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