The UK's fourth biggest supermarket chain Safeway has met City forecasts with a 4% jump in profits, crediting an increase in customer numbers at its revamped stores.

We continue to believe that Safeway will be the key victim of the deteriorating industry environment

ABN Amro analyst James Collins

The company said that profits before tax and one-off costs for the six months to mid-October came in at �188m ($300m), 4% up on the same period last year, while overall sales edged 2.2% higher to �5.1bn.

The profits figure fell short of the 10% increase reported by rival supermarket chain J Sainsbury on Wednesday, but was in line with analysts' forecast of a rise of between 1% and 5%.

City investors welcomed the news, marking Safeway shares 2.5% higher to 229.75p in late afternoon trade

Free spenders

Safeway chief executive Carlos Criado-Perez said the company now hopes to capitalise on its higher customer numbers by encouraging shoppers to spend more in its stores.

"Having attracted 1.5 million new shoppers to Safeway during the first phase of our strategy, the focus of our tactics is now also on growing customer spend," said Safeway chief executive Carlos Criado-Perez.

Safeway, which launched its store refurbishment programme two years ago in an effort to halt a decline in revenues, added that customer spending at its new-look stores was already growing more quickly than at its older outlets.

About 160 of the company's stores, representing a third of its total selling space, have now been overhauled, and a further 40 are earmarked for refurbishment over the next six months.

Lagging behind

But recent weak monthly sales growth figures have disappointed investors, contributing to a 30% decline in Safeway's share price since the start of the year.

Analysts believe the company's small size relative to its rivals Tesco, Sainsbury and Asda make it less able to withstand tougher retail market conditions.

"We continue to believe that Safeway will be the key victim of the deteriorating industry environment, with the business in a risky consumer-facing transition in increasingly difficult times," said James Collins at investment bank ABN Amro.

Safeway's results coincided with a report from market researchers Taylor Nelson Sofres showing that the supermarket's share of the UK market had fallen to 10% in the 12 weeks to 10 November, from 11% during the same period last year.

The report also showed that the UK's third biggest supermarket Asda had narrowed the gap with second-ranked Sainsbury to a single percentage point share of the total market.

There has been speculation that Safeway could become a takeover target, with Asda's owner Wal Mart named as a potential buyer earlier this year.

Safeway has denied reports of a takeover approach.