June 16 (Bloomberg) -- Tesco Plc, the world’s third- biggest retailer, said U.K. sales growth accelerated in the first quarter as the company’s discount food range kept shoppers from shifting to lower-cost rivals Aldi Group and Lidl.

U.K. same-store sales rose 4.3 percent in the 13 weeks to May 30 excluding fuel and value-added tax, the Cheshunt, England-based company said in a statement today. The pace compared with a 3.7 percent increase in the previous quarter on that basis. International sales rose 20.1 percent, helped by a weaker pound.

One in three Tesco shoppers are buying the discount products, Finance Director Laurie McIlwee said in an interview. The retailer introduced the low-cost range in September to retain customers who were trimming spending as the economy slid into recession. Increased sales of plants, toys and household products also helped reverse a decline in same-store sales in the prior six months.

Tesco’s U.K. stores are “over the worst of the competitive threat,” Caroline Gulliver, an analyst at Execution Ltd. in London, said in an e-mailed note. She has a “buy” rating on the shares.

The company’s share of the U.K.’s 120 billion-pound ($197 billion) grocery market fell to 30.8 percent as of May 17, from 31.1 percent a year earlier, according to Taylor Nelson Sofres Plc. U.K. revenue accounts for about 75 percent of Tesco’s earnings.

Forecast Reiterated

McIlwee said it is still premature to “call a recovery,” and Tesco reiterated its annual forecast. The retailer will reduce net debt by 1 billion pounds this year and next, he said.

Tesco rose as much as 1.9 percent in London trading, and climbed 6.1 pence, or 1.7 percent, to 362.2 pence as of 11:01 a.m. in London trading. The U.K. same-store sales growth matched the estimate of 14 analysts surveyed by Bloomberg News.

International sales climbed 11.4 percent at constant currency rates. Same-stores sales at the unit “are in growth” even with “some economies being a drag,” such as Slovakia and Ireland, McIlwee said. The company’s stores in the Czech Republic and Poland may be able to take share from competitors exiting those markets in the recession, he added.

In the U.S., Tesco plans to open 60 “Fresh & Easy” outlets this year, with Los Angeles “leading the pack” in terms of economic recovery. Arizona and Nevada, the two other U.S. markets Tesco operates in, are “a bit sticky and a bit slower,” McIlwee said.

“There have been quite significant teething problems at Fresh & Easy,” Sam Hart, an analyst at Charles Stanley & Co in London, said in an interview. “In the near term the jury will remain out.”

Tesco’s overall group sales rose 9.7 percent, including petrol. In the U.K., in addition to the 4.3 percent same-store increase, new outlets added 2.8 percent growth and the company’s personal finance unit contributed a further 2.2 percent.

To contact the reporter on this story: Andrew Cleary in London at acleary7@bloomberg.net.

Last Updated: June 16, 2009 06:10 EDT