Profit after tax increased 37% to £1.6 billion (US$2.1 billion) in the 12 months to February, Tesco said in a statement, as it cautioned that a “further increase in the competitive intensity of the UK market”, will hit its next earnings.

Tesco uses lower price offers to attract customers in the face of competition from German-owned discounters Aldi and Lidl, helping to lift revenues.

However, as competition heats up, the grocery giant lowered its outlook to expect an adjusted operating profit of between £2.7 billion and £3 billion, down from £3.1 billion.

Tesco shares fell 7% in early deals in London, alongside supermarkets Sainsbury’s and Marks and Spencer, marking rare fallers on the top-tier FTSE 100 index which surged as the US paused steep tariffs on most countries.

“Fears of a price war that could squeeze profitability have weighed on sentiment across the sector recently, but it hasn’t materialised yet,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

UK retailers are also tackling higher business taxes and a higher minimum wage, brought in this month by the UK’s Labour government.

Businesses have warned that these increases will raise the costs of employing people.

“Despite inflationary headwinds, we are committed to ensuring customers get the best possible value by shopping at Tesco, and see further opportunities to strengthen our competitiveness,” said Tesco chief executive Ken Murphy.

Tesco’s revenue grew 2.5% to almost £70 billion last year.

It announced also a share buyback of £1.45 billion, partly funded by the sale of its banking arm last year.

Tesco announced the deal in February 2024 for an initial payment from Barclays bank of around £600 million.