Tesco topped analysts' average forecast with a 12.5 percent rise in underlying first half profit on Tuesday and said its plans to expand in non food and the United States were on track.

Chief Executive Terry Leahy said improved service and ranges in its nearly 1,900 British stores helped account for the record profits, alongside 30 percent growth in its organic food sales and a 12.6 percent rise in non food revenues.

Clothing and electronics sales surged 19 percent and 36 percent respectively, Leahy said.

Because of that we have been able to attract more customers

and they have spent more, Leahy said in a telephone interview.

International continues its rapid development with sales of almost 18 percent at constant currency rates and a strong profit performance as well.

The country's biggest supermarket group said underlying profit before tax was 1.15 billion pounds in the 26 weeks to August 26, versus the comparable 26 week period the year before.

The average forecast of analysts in a Reuters poll was 1.122 billion pounds, within a range of 1.06 billion to 1.15 billion.

Sales including VAT (value added tax) were up 12.7 percent at 22.7 billion pounds. Excluding VAT they were up 12.6 percent at 20.7 billion pounds.

Analysts at brokerage Numis said Tesco's sales in Britain and internationally were strong.

The performance of the UK was very strong ... the second quarter number was boosted by the hot summer and the World Cup, so we could not expect this rate of growth to be maintained into the second half, Numis said in a note.

Core UK sales were up 10.2 percent, international sales up 21.3 percent and tesco.com sales up 28.7 percent.


Leahy brushed off suggestions that Tesco, which four years ago took 12 months to make a billion pounds of profit, could be facing saturation and the prospect of a dramatically slowing growth rate in its core British market.

Tesco thrives on competition, so we are confident looking forward that as long as we concentrate on our customers we will be able to cope with whatever the competition throw at us, he said.

Leahy also noted that the second quarter had seen some inflation in the face of energy, commodity and interest rate rises. Tesco said it saw prices fall around 0.4 percent, excluding petrol, in the first half.

The two quarters were different and you saw some inflation of around half a percent in the second quarter, Leahy said.

Tesco shares traded up 0.5 percent at 367.9 pence by 9:30 a.m., outperforming a slight fall in the DJ Stoxx index of European retailers.

It trades on a multiple of 14.8 times 2008 forecast earnings according to Reuters data, a 27 percent discount to UK peers.

Tesco holds a 31.4 percent share of the 120 billion pound UK grocery market, more than a third more than that of its nearest rivals J Sainbury and Wal Mart's Asda. But both smaller supermarkets are outpacing Tesco's growth rate.

It is responding with plans to enter the United States next year and Tesco Direct, a new home delivery service for more than 8,000 non food items, which it said had attracted more than 1 million hits on its Web site in the three weeks since launch.

With regard to the rollout of its Fresh & Easy stores in the western United States next year, Leahy denied speculation Tesco could be considering straying from its original aim to set up convenience stores and would now take on big box retailers.

We haven't altered from our brief which is we will be addressing the market for convenience, he said.

Tesco proposed an interim dividend of 2.81 pence a share, up 11.1 percent on the year.

(Additional reporting by Anshuman Daga and Mark Potter)