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LONDON (Reuters) - Britain's Tesco Plc said a 1 billion pounds turnaround plan for its home market was starting to work as it posted its highest sales growth in three years over Christmas.
Tesco, the world's third-largest retailer, beat forecasts for underlying sales growth, regaining an edge after a dismal Christmas in 2011 prompted its first profit warning in 20 years and a strategic rethink.
Shares in Tesco rose more than 2 percent to hit their highest in a year. The retailer also announced the appointment of Chris Bush as managing director to run its British business.
"It sets the scene nicely for a year of significant strategic change," said Panmure Gordon analyst Philip Dorgan.
He expects to see a substantial reduction in capital expenditure, a refocus online, a commitment to higher returns on investment, and share buybacks.
Sales at Tesco's British stores open over a year, excluding fuel and VAT sales tax, grew 1.8 percent in the six weeks to January 5, part of the firm's fiscal fourth quarter, compared with analysts' forecasts of up 0.5 to 1.5 percent and with a third-quarter fall of 0.6 percent.
"In the UK I think we were back on form," CEO Philip Clarke told reporters. "But we need to keep our feet on the ground, this was only a six-week period."
The outcome was driven by a stronger food performance and an 18 percent rise in online food sales, though general merchandise - including electricals - remained a drag on sales growth.
Tesco did, however, benefit from easy comparative numbers, as in the same six week period of its last financial year like-for-like sales had fallen 2.3 percent.
"Yes, the results look good. Still, the trend is far from established, and they were flattered a bit by last year being so poor," said one fund manager who counts Tesco as one of his largest holdings.
The group is battling to regain momentum in a weak UK economy, with consumers fretting over job security and a squeeze on incomes. Tesco has suffered more than rivals, in part because it sells more discretionary non-food goods where shoppers have cut back most.
Clarke launched his strategy to revive UK sales in April, investing in more staff, revamped food ranges, refined marketing and smartened stores that give more space to food.
Yet some investors are still to be convinced of its merit.
"The expression ‘one swallow doesn't make a summer' comes to mind," said one top 20 Tesco investor. "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."
Britain's No. 3 grocer J Sainsbury, which updated on Christmas trading on Wednesday, accused Tesco of being "a bit disingenuous" in headlining with its 1.8 percent underlying sales growth figure, rather than a figure of 1.4 percent which excludes activity related to coupons.
Bush, formerly chief operating officer in Britain, and like Clarke a Tesco lifer, will step up to run the UK business.
Clarke had taken direct control of the UK business in March after ousting Richard Brasher.
"My job is to set the vision and the strategy together with Chris ... It will give me a bit more time to dedicate to my other responsibilities, running a group on three continents," said Clarke.
Shares in Tesco, down 10 percent over the last year, were up 9 pence at 358 pence by 1304 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, Britain's biggest clothing retailer, posted a weak trading update, while camera specialist Jessops entered administration.
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 Asda, Sainsbury and Wm Morrison.
On Monday Morrisons reported a Christmas sales fall. 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.
Tesco, which trails Carrefour and Wal-Mart by sales, said group sales rose 3.9 percent, excluding petrol.
Additional reporting by Sinead Cruise and Kate Holton; Editing by David Holmes and Jane Merriman