Must read: Tesco still number one after profit upgrade

Tesco (LSE:TSCO) has raised its operating profit forecast to between £2.9 billion and £3.1 billion, up from a conservative £2.7 billion and £3 billion. UK first-half like-for-like sales also grew by 4.9%.

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Tesco benefitted from the good weather over the summer, helping to offset pressures from price cut pledges at Asda. The group’s sheer scale feeds its appetite for lowering prices for customers through the likes of Aldi Price Match, Low Everyday Prices and Clubcard Prices, while a strong focus on significant cost reduction creates something of a virtuous circle.

Tesco has also benefitted from people dining in more than eating out amid cost-of-living pressures, and chief executive Ken Murphy said he is betting on a ‘good Christmas’ despite intense price competition.

Nonetheless, Tesco faces headwinds including the new packaging level which it estimates will cost around £90 million this year, increased use of weight loss drugs although Tesco says it is yet to see an impact there, and strong competition from Sainsbury (J) (LSE:SBRY), Marks & Spencer Group (LSE:MKS) and the discounters which Murphy highlighted as the ones to watch. Tesco could also face consumer confidence pressures amid the shaky macroeconomic backdrop and uncertainty around the Autumn Budget in late November.

Expectations were high going into today’s results, yet the juggernaut still managed to impress investors with an uplift to its profit guidance. This suggests there is little sign that the company is losing its dominant grip on the British aisles.

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Tesco is a leading force in the UK grocery sector with its market share growing to 28.4% this year. Rival supermarkets typically take market share from each other rather than Tesco. That’s partly why the stock is largely viewed as the preferred play in the sector.

Traders are reacting positively to profit outlook upgrade, with the stock rallying towards the top of the FTSE 100, lifting other supermarkets like M&S with it, amid a positive read across for the wider sector. Shares in Tesco are now up over 17.5% year-to-date and have exhibited a strong uptrend since the post Liberation Day trough in April.