M&S says Christmas was its best for three years

Marks & Spencer revealed today it enjoyed its best Christmas for three years as food sales surged and it avoided discounts on its clothing ranges.

The retailer topped expectations with like-for-like sales growth of 2.9% in the 13 weeks to New Year's Eve, persuading many in the City to ramp up their predictions for annual profits.

M&S described the performance as encouraging because there was no repeat of the two "mega-days" of bargains held in the run-up to the previous Christmas to shift surplus stock.

Food saw the strongest improvement with same-store sales up 5.1% against City forecasts of 3% growth - driven by products that are easy to prepare such as delicatessen platters and the so-called "no touch turkey" which is sold in a bag.

General merchandise rose 0.8% to halt a trading slump in this category at M&S dating back to the first quarter of 2003 when sales were last positive.

Today's statement comes on the day that the British Retail Consortium (BRC) said food was a key driver of a 2.6% improvement in UK retail sales last month, although it found that clothing and footwear struggled.

Speaking after M&S shares recently surged above £5 to their highest level since 1998, chief executive Stuart Rose urged investors not to get ahead of themselves.

Mr Rose said it was too soon to say that the UK high street had turned a corner and consumer confidence had improved, while M&S was facing increasing cost pressures.

He said: "There is likely to be some tightening of belts in January, February and March. I think customers will be quite hard to attract - I am not too optimistic."

M&S joins the likes of supermarket giant Tesco in warning that cost pressures in the shape of higher fuel, utilities, rent and rates would have an impact next year.

Richard Ratner, of broker Seymour Pierce, expected to lift his profits forecasts by £10 million for this year to £730 million and was now looking for a haul of £785 million over the following 12 months.

He said: "Whilst Stuart Rose has done all the right things to produce the goodies this year, we point to underlying costs rising by £90 million to £100 million each year and most of the quick wins out of the way after 2007."

M&S embarked on a major pre-Christmas advertising drive featuring Sixties model Twiggy and has cut prices in past months on everything from T-shirts to jeans.

It has also attempted to secure better deals from suppliers and revealed today that there would be 35% less stock in its clearance sale than a year ago.

Total sales in the UK were 4.8% higher and this performance was again led by food which enjoyed 7.9% growth, while general merchandise rose more slowly at 2.1%.

M&S revealed it was also faring better at selling its clothes without resorting to discounts, with full-price sales of general merchandise up 5.3% compared with 0.4% in the previous quarter.

While there had been a solid improvement in sales of womenswear and menswear at M&S, Mr Rose said there was still work to be done to grow sales of lingerie and children's clothing faster.

Mr Rose said: "I believe our volume market share has improved and our market share in full price clothing has stabilised for the first time in around two years. In volume, we must be hurting some people."