* Q1 profit excluding items $0.55; Wall St view $0.53
* Lowers fiscal 2010 EPS, sales forecasts
* Sells 36 Utah stores
* Shares up 4.2 percent (Adds executive, analyst comments, byline, updates stock activity; adds LOS ANGELES TO dateline)
CHICAGO/LOS ANGELES, July 28 (Reuters) - Supermarket chain Supervalu Inc (SVU.N) posted lower quarterly profit on Tuesday, hurt by stepped-up competition and the recession, but its shares rose 4.2 percent after it said it would sell 36 stores in Utah.
The operator of about 2,500 Albertsons, Jewel-Osco, Shaw's and Save-A-Lot supermarkets said it will sell most of its Albertsons stores in Utah to Associated Food Stores and wants to sell four other stores in the state. [ID:nWNBB3883]
The move marks the first big asset sale under Chief Executive Craig Herkert, who came to Supervalu from grocery leader Wal-Mart Stores Inc (WMT.N) in May. Herkert declined to say whether other asset sales were in the works.
"Part of the bullish story that people have here is that they're going to engage in asset divestitures," said Pali Capital analyst Robert Summers.
Profit fell to $113 million, or 53 cents per share, in the fiscal first quarter ended June 20, from $162 million, or 76 cents per share, a year earlier.
"Consumers have become even more value-focused and cautious in their spending ... It takes a bargain today to achieve a sale," Herkert said on his first quarterly call with analysts.
Low-margin discounted items made up a bigger-than-expected percentage of store sales, which fell in the quarter. Herkert said the chain needs to lower everyday prices rather than depend on deep discounts.
Steep declines in food prices combined with less frequent purchases of more profitable items like flowers, precut fruit and drinks from in-store coffee bars contributed to the 30 percent drop in quarterly profit.
Supervalu, expecting pressure to continue on consumers in the near term, cut its sales and profit expectations for the fiscal year. The current second quarter should be the weakest one of the year, said Chief Financial Officer Pam Knous.
Its weaker outlook came five days after rival Safeway Inc SWY.N slashed its profit view [ID:nN23383604].
Supervalu's revised forecast was not a surprise, and some investors were looking for a bigger cut, said Summers, who remained the sidelines with a "neutral" rating.
"It's too cheap to short, but the fundamentals don't warrant getting involved," he said.
Supervalu and Safeway have been paring prices as they battle retailers ranging from Wal-Mart to dollar stores, which have attracted shoppers grappling with rising unemployment and the recession.
In markets like Southern California and Chicago, Supervalu has cut prices by up to 20 percent on thousands of staples.
Excluding store closure and one-time acquisition-related costs, earnings were 55 cents per share. Analysts expected 53 cents, according to Reuters Estimates.
"It's entirely impossible to spin the quarter as anything but a significant disaster," said Summers.
While earnings topped analysts' recent expectations, Supervalu had warned in late June that profit would be "substantially below" expectations after it cut prices and boosted promotions to lure shoppers. At that time, the average view was 65 cents per share.
Net sales fell 4.7 percent to $12.72 billion, including results from the company's supply chain business.
Identical-store sales were off 3.2 percent, in line with the decline of about 3 percent the company predicted. Those sales include results from outlets operating for four full quarters, including store expansions and excluding fuel sales.
Supervalu cut its fiscal-year adjusted earnings forecast to $2.01 to $2.21 a share from a prior target of $2.50 to $2.65.
Jefferies analyst Scott Mushkin said the new outlook "should be viewed positively given expectations for a range as low as $1.80-$2.00."
The company now expects identical-store sales to fall about 3 percent this year. It previously expected a range of down 1 percent to up 1 percent.
Supervalu shares were up 59 cents at $14.58 in mid-day trading on the New York Stock Exchange after soaring to $15.24.