Shares in Sainsbury's (LON:SBRY) gained more than 14% after saying annual profits would top City forecasts, sparking a broker upgrade.
The stock lifted 33.6p to 262.9p as the supermarket chain said full-year underlying pre-tax profit was likely to moderately top expectations.
Broker Shore Capital said it was ditching its 'sell' advice on the company in favour of a 'hold' at 260p, although it added a note of caution.
Shore analyst Clive Black said: "We would not expect Sainsbury’s to raise guidance if it was not significantly more confident about achieving such an out-turn.
"However, we do need to point out that UK grocery remains a competitive and potentially volatile sector."
Jasper Lawler at CMC Markets also urged investors against "jumping the gun".
"The supermarket sector still faces huge pressure from the discounters, particularly now with Aldi’s intended entry into online shopping," he said.
Cantor Fitzgerald, which is keeping its 'buy' advice on Sainsbury's, said: "We were right to be more positive on Sainsbury’s and its ability to beat current consensus this year, despite the current pressure on profits and the industry resets on ranges and pricing."
Sainsbury's said like-for-like retail sales for the second quarter were down 1.1% excluding fuel and also down 3.3% including fuel.
But total retail sales for the second quarter were up 0.3% excluding fuel and down 1.8% including fuel.
Sainsbury's and Britain's other established supermarket chains such as Tesco (LON:TSCO), Morrisons (LON:MRW) and Wal-Mart-owned Asda have faced a strong challenge from discount supermarkets and online retailers.
Chief executive Mike Coupe said Sainsbury's volume and transactions rose as the decline in average supermarket basket spend stabilised.
"Whilst the market is clearly still challenging, with food deflation impacting many categories, we are making good progress," he said.
"Year-to-date we have traded well, with both sales and cost savings ahead of expectations. Should current market trends continue, we expect our full year underlying profit before tax to be moderately ahead of our published consensus."
Volumes of the group's premium Taste The Difference range increased more than 4% in the quarter.
The chain said a move to reduce promotions in favour of lower regular prices was making its demand forecasting more accurate, driving better availability and lower-than-expected waste levels. It gave its shop staff a 4% pay rise from August 30.
Sainsbury's opened 27 convenience stores in the quarter and grocery online orders rose more than 15%.
It also launched its Tu clothing website nationwide and the first six weeks of trading significantly exceeded its expectations, with most customers choosing to collect orders in store.